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| 0:33 | Intro. [Recording date: May 23, 2013.] Russ: Our topic for today is your book, Uncharitable. It's a rather extraordinary book which I found extremely interesting and provocative. If you are involved in a charity out there listening, or if you give to a charity, which I hope is almost all of you, you should read this book or watch Dan's Technology, Entertainment, Design (TED) talk or listen to the rest of this podcast. There's a lot to think about. You argue that our cultural attitudes towards charity have made charitable organizations less effective. What's wrong with how we think about charities? Guest: Well, we have these two rule books. We have one for the non-profit sector and one for the for-profit sector. And in the name of an ethic, this separate rule book really discriminates against the sector in at least 5 different areas that I described in the book: compensation, the ability to advertise and market on the scale that the for-profit sector does, the ability to take the kinds of risks the for-profit sector takes, the amount of time the for-profit sector has to demonstrate the value of an investment, and last but not least a capital market itself. So we have this deprivation-, all-volunteer-, all-donated-goods-mindset about the charitable sector, and it may have worked when charity was about neighbor-to-neighbor assistance, but it doesn't work when these organizations are attempting to solve large-scale global logistical problems. Russ: Let's take a couple of the examples you talk about in the book. Let's start with compensation. So, it does sound good, as you just mentioned, to get things donated: We're a charity, we didn't pay for any of this, this is all donated; a lot of our workers are volunteers and our staff is paid a very small amount, because that way more of your money goes to the cause. And those two issues--compensation and then overhead, which you discuss a lot in the book--those sound great, don't they? We don't overpay our employees and we keep our overhead low that way so that more money goes to the cause that you all care about. What's wrong with those arguments? Guest: It does sound good, doesn't it? More of your money goes to the cause. Well, there are a number of different problems with that. First of all, this focus on costs and this focus on overhead eliminates any conversation about impact. So, we're not having a conversation about how effective the organization actually is at solving problems. So, who cares if the overhead is low if no problem is getting solved? And really, who cares if the overhead is high if the problem is getting solved, because ultimately we want the problem to get solved? So the overhead question has a number of flaws. A few of the easy ones to talk about and describe are, first, it operates on a mistaken theory of waste. So, a charity tells you $.90 of your donation goes to the cause and you think: Well, that's great, now I know that they don't waste any money. But you don't know that at all. How do you know they are not wasting the $.90 that's being spent on the cause? That's where all the money goes; that's where the largest opportunity for waste is. Related to that, it tells you nothing about the quality of services. So, that soup kitchen can tell you $.90 of every donation goes to the cause and you'll never learn that the soup is rancid. Because you never asked about the quality of the soup. Next, the percentage of your donation that goes to the cause depends entirely on how the charity defines the cause. So, the more broadly they define the cause, the higher the percentage they can tell you is going to the cause. It actually operates on a false theory of transparency as well, because unless you know the underlying accounting and definitions of the cause, there is no transparency in that simple articulation of an overhead percentage. Worse, this demand the charities keep overhead below prevents them from spending money on the overhead things they have to spend on in order to grow. And that's how we institutionalize the miniaturization of these organizations. We're dealing with massive social problems, so the last thing we want is miniature organizations. On the simple question of fundraising, a donor will say: Well, I don't want them to spend any money on fundraising; I want as much as possible to go to the cause. Basically you are saying: I want to be the only donor. Because I don't want you to spend any money going out to find other donors. I want the full weight of the organization to rest on my shoulders and the other donors that you now have. Well, if a donor thinks about that, that's not what they want at all. So, those are just a few of the deep flaws with the overhead ratio and using it as a proxy for good. Russ: Now, talk about compensation, because I think that's a great example. I was listening to a high-ranking exec in a charity and he was bragging about the fact--this was after I'd read your book, and it was a couple of weeks ago--that when they bring in more money, they have some revenue source, when they bring that in, he said: Not a penny goes to my salary. It all goes toward the cause. And I thought, first: Yeah, that's great. And then my second thought was, having read your book: Maybe that's not the best way. So, explain why not. Guest: Well, we want to be able to recruit the best talent in the world to solve the world's largest social problem. And I think it's ridiculously naive for us to believe that economic incentive doesn't play a role in that. It's ridiculous to believe that people will do everything out of the goodness of their hearts. People will do a lot out of the goodness of their hearts, but they won't take a half-million dollar salary cut. Russ: Or they are less likely to. Guest: Now there are some people in the sector who say: Look, I work for $160,000 a year and I could be making more money in the for-profit sector, so everybody else should. I think it's arrogant to impose your morality and your ethic on everyone else. If that works for you and you are happy, great. Wonderful. Good for you. But there may be somebody who is extremely valuable who could make a huge difference who wants three times that money, and you should not have the unilateral right to say that charities shouldn't be able to hire that person. It should all be based on--see, here's another case where we look just at cost. What is that person costing us? And we don't look at the benefit side of the equation. No first-year business school student would survive past the first semester if they didn't show the ability and the inclination to do a cost-benefit analysis. So the question is not what does the person cost. The question is: What value is the person producing for that cost? So, you could be getting someone--let's say we were looking at the simple issue of fundraising. You could be getting someone who is only paid $80,000 and the organization says, we don't pay any of our fundraisers any more than $80,000; but that person is only capable of raising $160,000 a year or two times their salary. Versus another person who might cost $300,000 but is capable of raising $3 million a year. Now which person is cheaper? But we don't ever look at it in that way. We don't ever look at it rationally. Even economists tend to--we have this religious, emotional perspective on these things instead of a rational one. And I think the people who suffer in this world are desperate for us to take a rational look at these things. |
| 9:56 | Russ: Now, one of the virtues of paying relatively small amount for talent and leadership roles in charities is that it's going to draw people in, who are going to apply for those jobs, who are devoted to the cause. Of course it also draws people who don't have very good alternatives. That's the other side. That's your point. But the flip side is that it does tend to attract people who are willing to sacrifice money in return for their devotion for this particular cause. If we offered competitive salaries, maybe people are making three times as much as a leader in a charitable organization, how do we monitor devotion? How do we monitor excellence? How do we monitor whether people are effective--which is the point you continually and correctly raise? Guest: It's such an arrogant point of view for some people in our sector to say, well, we don't want to introduce money into the picture because that will bring in people who don't have any passion for the cause, and only those of us who don't care about money are really passionate about the cause. Really. You mean the people who work at Apple aren't passionate about the iPhone and the iPad and beating the pants off of Android. Really. You mean the people at Google aren't passionate about an open system and spreading Android? A heart surgeon who makes a million and a half dollars a year isn't passionate about heart surgery and doesn't have patients coming to him or her based on how effective they are at performing heart surgery. It's absolutely sophomoric. People will say to me: If somebody wants to make a lot of money, it's a sign that they don't really belong in the non-profit sector. But excuse me, it's those people that make a lot of money that make up the rolls of your major gift roster and that make your organization possible. So how on earth can you say that they don't have any heart because they have an interest in money? You are looking at human beings as half a person. That they don't have any interest in--let's not talk about the abstraction of money--that they don't have any interest in sending their kids perhaps to a private school, that they don't have any interest in taking the best possible care of their parents in their old age. That they don't have any interest in being able to travel with their children around the world, that they don't have any interest in being able to make large charitable contributions. So, here is another case where we have kindergarten-level thinking about these things. Russ: Well, I really like your point because in the aftermath of a natural disaster, when people decry high prices for fundamental things like water and milk and basics, I always make the argument that if you let the price rise, you'll draw people who both want to make money--that's true, that's going to be one of the reasons they'll load up their truck with plywood after a hurricane or a tornado and travel 400 miles; but the other reason is because they are going to help people. Why would you assume they only care about the money? The beauty of the money is you get both, the full range of human desires and facets. And what you are pointing out is that you have said, culturally, oh no, this is only for people who don't care about money. As if such people actually exist. They don't of course. It's ridiculous. Guest: Right. If you tell me that you don't care about money, I say to a hypothetical person, and that people shouldn't want to make money in the charitable sector, then why would I want to pay somebody three times the amount of money you're making do you get all bent out of shape? You told me you don't care about money. Russ: Now, this seems pretty logical to me, and I think even to non-economists when they hear it. What's interesting to me, and you chronicle this very nicely in the book, is that you'd think people would go, that's a good point, you're right. They don't though. Historically they haven't. What they do is when a charity is found to be paying a large amount of money to an executive, there's a scandal. And you give example after example of media coverage and how damaging it is. Guest: Right. Salaries that would be utterly unremarkable, $6-$700,000 dollars in the for-profit sector, are scandalous in the non-profit sector. Meanwhile, that the head football coaches at the top 20 universities in the United States each made at least $2.6 million dollars last year and they are all non-profit universities. But God forbid you should pay the head of Save the Children $2.6 million--call in the Attorney General. Russ: There are people who are offended by the college coach salary. But I take your point. Guest: Well, then let's move on to Jon Stewart[?] who makes $16 million a year or David Letterman who makes $28 million a year or Judge Judy who makes $45 million a year--makes the football salaries look absolutely poverty scale in comparison. |
| 15:15 | Russ: Tell us a little bit, as background to this conversation, what you did at Pallotta Teamworks, why it was controversial, and why it was successful; what you actually accomplished. Because it's an incredible story. Guest: Yeah. Well, we created the AIDS Rides and the Breast Cancer 3-Days which really led to the creation of-- Russ: Explain what those are. Guest: Yeah. They were very different types of charitable events. They were not a 5-k Saturday morning walk-a-thon or a 10-mile bike ride around town. These were really epic journeys that asked people to draw deeply from the well of their potential. So, the AIDS Ride for example in California was a 7-day ride, 600 miles from San Francisco to Los Angeles, or the Montana Ride across the Continental divide. The Breast Cancer 3-Days were 60-mile long walks that lasted three days; and you had to go the whole 60 miles, you had to go the whole 3 days, you had to sleep in a tent overnight; and you had to raise a minimum amount of four figures in order to do it. And that had never been done on these 'thon events before--they always welcomed people with open arms no matter how much or how little they raised. So it was the combination of the multi-day, epic, grueling nature of these things, with the 4-figure minimum fundraising requirement, with mass marketing--full page ads in the New York Times, 60-second radio spots in the morning and drive time in the evening alongside the ads for cellular service, that the combination of those three things created something new and created something very successful. And we had 182,000 people ride or walk in one of those events over the course of 9 years. They raised a total of $582 million dollars-- Russ: $582 million dollars? That's so mind-boggling. That must have been extraordinary. Guest: It's a lot of money. And 3 million Americans donated to the event. These things have been distorted over time; now it's sort of called the Athletic Event industry. It was never about athletes. In fact, we never marketed to athletes. We were looking for the 69-year-old woman who had lost her son to AIDS and needed a huge vehicle for the expression of all that anger and grief. We were looking for average people who wanted to do something extraordinary, and they came in droves. And they were the most beautiful examples of civic engagement and human compassion that you've ever seen in your life. Because every one of the participants had a story like that. So it was about much more than the money; and the money was huge. And this was 1993, when we started this. There was no lexicon for social enterprise, social entrepreneurship, doing well and doing good. There was no social enterprise program at Harvard, no Stanford Social Innovation Review, none of this conversation was happening. The lexicon was: You are good if you sacrifice and you are a parasite if you don't and you try to make any money doing good. And so, I think it was the combination of an entrepreneur, a young entrepreneur--me; I was 32 years old at the time I started it, and I had a very public presence. I would speak at all of the events and at the opening ceremonies, at the closing ceremonies, the company had my name on it--in the tradition of the Walt Disney Company. My grandfather had a construction company called Pallotta and Sons Development, and I believe if you believe in something then you stake your reputation on it and put your name behind it, in the way that the for-profit sector often does. I think it was the combination of that, the lack of any kind of a support mechanism, academic or otherwise, to argue against things like overhead. And the fact that we were doing things in a very business-like way, that we were buying full-page ads in the NY Times, that we were paying our executives 6-figure salaries; and the fact that we were so successful so quickly--all of those things created a story that the media could not resist. And so we got labeled as controversial for having an average overhead on these events of 40% on the Breast Cancer 3-Days. Well, bear in mind, we were feeding people, you know, 9 meals over the course of three days; we were putting up 4000 sleeping tents, mobile catering, mobile showering, mobile medical units, sewage systems that had to be moved every day--I mean, this massive military-like infrastructure. The fact that we were able to do it for $.40 on the dollar was remarkable. Picture any kind of a vacation industry that had to show a 60% margin on something like that, right? Russ: Yeah. So, the $582 million that you raised, was that net of those costs or before those costs? Guest: That was gross. Our net over the course of that time was $305 million. We were a for-profit company--that was part of the controversy as well. We simply charged a fixed production fee for each event. We didn't do any commission-based fundraising. And 100% of the money went to the charities, and the charities then reimbursed us on a dollar-for-dollar basis for all of our expenses because we were administering all of the expenses for the event. And then they paid us our fee--a hindsight calculation puts our fees at 4.01% of the gross. For conceiving the events, producing the events, managing all the employees, administering all the expenses, taking risk--in many cases with our own capital--to launch the events. 4.01% fee--it was close to what the credit card companies were getting for just processing the donations without taking any of that risk. The interesting thing, Russ, is that the media was crucifying us and the media was making more money on each event than we were. We were basically a business development arm for the media, because each of our events had like a $4-$500,000 dollar paid media budget. So we get paid, say, $370,000 to produce an event which had a $500,000 media budget. So, here, NY Times, here's $75,000 for you for your full page ad; here, Clear Channel, here's $100,000 for you for the Subway ads that we're going to run. So the tragic irony abounded. Russ: Well, the tragedy got stronger, because the organizations that you benefited with that money, after the controversy in the media, my understanding is that they said, Well, we'll do it ourselves. Guest: Yeah, exactly. Russ: How'd they do? Guest: They didn't do well. The San Francisco AIDS Foundation and the Los Angeles Gay and Lesbian Center decided, after we had 50% overhead on our California AIDS Ride in the year, I think it was, 2000 or 2001, which was higher than our overhead had been in previous years for a number of one-off factors, reasons, was that they said, Well, we're going to go do it on our own, and lower this overhead from 50%. When you do an apples-to-apples comparison--I have it in the book and I don't have that in front of me--but their overhead went up to something like 65%, and their net income went down from $6 million with us to I think about $1.5 million on their own. So a $4.5 million dollar loss in one year of unrestricted money for AIDS services. And that continued the next year as well. The Δ [delta, meaning change] over the course of several years was pretty huge. I think now, maybe, whatever it is, 10 years into it, they might be up to the level that we were at in 2001. Now, when they left, Avon decided, well, the Pallotta team or its contracts must not be enforceable--the contracts that say we own the event, you won't produce it without us, so we are going to test those contracts and we are going to go do the Breast Cancer 3-Days on our own. Well, what happened there was truly dramatic in the worst possible way. Their net income went from $70.9 million with us in 2002 down to $10 million in 2003. So a $60 million dollar loss of unrestricted income for breast cancer research in one year. And their overhead went up. And I don't know that they've ever recovered those numbers. I know for the next two or three years they didn't come close to recovering the numbers that we had in 2002. Russ: It's an incredible story. |
| 24:58 | Russ: Now, let's move to some of the other issues you raised that you talked about at the beginning of the podcast. Let's talk about advertising. Right now, charities don't advertise very much--for reasons you've talked about. What should they be doing? Guest: They should be building market demand for their philanthropy. This is something that unfortunately the public doesn't understand, because it often gets explained in very complicated ways. But the basic premise is: Look, we have to let these organizations spend more money on fundraising so that they can recruit more donors and so that they can raise more money and have more money to implement their programs. So when I say 'do more advertising,' I mean build more demand. And that could be in the form of television advertising or newspaper advertising or digital advertising. It could also be in the form of hiring more major gift officers. Doing more direct mail. Putting more money into traditional and new forms of fundraising to bring in more donations. Charitable giving remains stuck at about 2% of Gross Domestic Product (GDP) ever since we started measuring it in the United States in the 1970s. And that's a really important number because it tells us in four decades the non-profit sector hasn't taken any market share away from the for-profit sector. Well, if you think about it, if you don't let these organizations spend money building market share, how are they going to build more market share? That 2% translates into about $300 billion dollars annually. But most of that money goes to hospitals and higher education and religious institutions. Only 15% of it goes to health and human services charities, so that's about $45-$50 billion a year. Now that's just not nearly enough to solve problems like homelessness and violence against women, and cure cancer and prevent multiple sclerosis, prevent suicide, and all of the different things that that money is supposed to do. So it's obvious on the face of it that we need more money. Well, how do we get more money? Organizations have to raise more money. How do they do that? Make an investment in it. So, from a perspective of scale, that's what has to happen. If we could move charitable giving to 3%, or 4%, of GDP and have that money go disproportionately to health and human services charities, because those are the ones we encourage to invest in their growth, you know, you are talking about a tripling, a quadrupling, a quintupling of the size of that sector. Well, now you are kind of talking about the scale it would take to solve these problems. Bottom line, I tell people is, argue with me till you are blue in the face; the basic point is this: If you don't want to see things change, if you want to see these problems stick around for a long time, we have a really great system for doing that. Russ: Yeah, the status quo. Do people argue with you a lot? Guest: I have to say that the response inside the sector to these arguments has been overwhelmingly positive, enthusiastic, passionate--like, people are jumping up and down saying this is what I've always thought; I'm glad somebody finally said it; what do we do about it. Russ: How do we get there from here? Guest: And then we have, you have 7% of people who like to harp on the executive compensation thing, you know--like you have some percentage of donors who are just never going to give because they are cheap and they make up all kinds of reasons, like charities are wasteful and this and that. Robert Kennedy saying: 25% of the people are against everything all of the time. So, I'm doing a little better than that. Russ: Congratulations. |
| 29:04 | Russ: Now, I love your passion and I love your point about social problems and we need to make these organizations get bigger. One of the challenges they face, which is independent of the issues that you raise is that the Federal government spends a lot of money, and state and local governments spend a lot of money on these causes. Which makes it harder for private charities to start in these areas, to thrive in these areas. Just to take an example from this week, it's very interesting--terrible tragedy in Oklahoma from the tornado. It just happened a few days ago. An incredible gesture of kindness, Kevin Durant, Oklahoma City Thunder, the basketball team, donated a million dollars. Now, I don't know what he gave it to; that's a lot of money. I don't care how much he makes--a million dollars is a lot of money to give away. So, I don't know who he gave it to or what effectiveness it will have. But what's striking when I thought about it is one of the things that deters people, that stops people from giving, is that that's going to be declared a Federal disaster area; there's going to be a huge amount of Federal money, and some state money, but mostly Federal that's going to go there. So, I'm going to be contributing to Oklahoma through my taxes; and my incentive to do that through private organizations is reduced. Now, private organizations can still raise money, if they go work on aspects of the problem that the Federal government doesn't touch; they can get money if they do it better than the Federal government does, than the Federal activities. That's certainly true. But do you agree that one of the handicaps for the growth in the charitable sector is the involvement of government in these areas? Guest: I do. I absolutely think that government crowds out charitable giving, not only because of your sentiment about it but because you just have less money to give to charity. So, you have about $300 billion a year coming in from contributions; I think you have another $300-$400 billion a year in fee-for-services; and then you've got another $3, $4, $500 billion coming from the government. So it's really like $1.1, $1.2 trillion. But that government money comes with so many strings attached that it really contaminates it and hampers its ability to do effective things. For one thing, you've got government officials from some central place telling the organizations that work on the ground how they want them to spend the money, instead of the organization that works on the ground getting to decide for themselves. Then you've got the Federal government or state government saying we will only allow you to use, say, 11% of this for overhead. Well, what if the organization's overhead is actually 18%? So, the government is not paying for 7% of it. So the organization has to go find that money from somewhere else. It has to steal it from other programs. Now, if the government money is disproportionately large, then you are talking about a real underinvestment in administration and organizational strength. I think that's why you see, in Europe, there's so much government social service that you see much lower levels of charitable giving. Russ: I don't think it's because they are not as nice as we are. It's possible, but I don't think that is the reason. Guest: Yeah. Their assumption is, well, government takes care of all of that. We could be getting to a place where we are not far from that here in the United States. It will be interesting to see what the Affordable Care Act does in terms of people feeling that they need to give to free community medical clinics and things like that. I think that will probably take a decade or so to work it's way out. But the real issue I think is the government dictating how all that money gets spent, so you don't have individual ingenuity, small organization innovation coming to bear on these problems. You have big bureaucratic central direction. Russ: Well, I interviewed Paul Tough, who is the author of How Children Succeed. The book is a very interesting look at the challenge of childhood and the grit, determination, self-control, achievement. And basically he says most of our efforts to do that through the government have failed. They don't have the right levers; they don't have the right tools. He gives the example in this book of the Harlem Children's Zone, which is this incredible, holistic approach to helping children. It's not just, oh, we're going to make a better school; we're not just going to have a good nutrition program; we're not going to just give some help to single parents who are struggling with time and other issues. We're going to do it all. And that organization has grown and grown and grown. And in the podcast, in the interview, and in his book, Paul complains about the fact that the head of the Harlem Children's Zone has to spend a lot of time fundraising. And wouldn't it be better if they just had a lot of money from the government? My attitude, my answer to him, is: That's one of the reasons he's successful--he has to convince people he's spending their money well. And that's what makes that program work. And we need more of that. We need the government to get out of the way, to let those entrepreneurs, like yourself, create new solutions to these problems that are very difficult to solve. Guest: We have a fundamentally broken marketplace. In the cellphone business, we have a very healthy marketplace because the information is highly accurate. When I buy an iPhone, I know immediately the quality of that device as compared to a Samsung phone, for example. Not so with charity. When I give a donation, when I'm considering giving a donation to charity, I'm looking at overhead ratios--because that's what I've been taught. So I give to the charity with the lower overhead. Then the example of the soup kitchens--what if that means you are giving to the soup kitchen with the rancid soup? In the case of government grant, you have all of these different organizations fighting for government money, not on the basis of the impactfulness of the programs but on the basis again of overhead ratios. It's like using the fuel gauge to figure out how fast you are going. I mean, it could not be more broken. So if we wonder why we are not creating social change: we are not incentivizing it. The only thing we are incentivizing is low spending on overhead. No wonder problems are not getting solved. |
| 36:00 | Russ: So, I want to come back to a question I asked you a few minutes ago. You went off on a different part of the question. So, I'm considering giving to a charity. I'm thoughtful; I'm not going to just look at the overhead ratio. I'm not going to look at its rating based on that. I want to know if it's solving the problems. And one of the challenges here is that in the for-profit world we have a way to measure whether the organization is achieving its goal--which is profit, the bottom line. Some charities have some revenue sources. But in general the more interesting ones don't. They're not selling anything. They're selling something--excuse me--but they are not collecting money for what they sell. They are trying to achieve something. And they don't have very good measures. They don't have any, often, of how they are achieving it. So how is the donor, or the board member, or the head of the charity--how do I find out whether I am doing a good job? Guest: Two things. We need an information infrastructure in the United States for this, and I've written about the need for what I call an iTunes for charity that has narrative and financial and impact information that's user-friendly on every single organization in the country, that's updated regularly, that's online, and that's objectively gathered. We need an infrastructure like that. And it isn't going to happen for $2, $3 million. It's going to be expensive to build but relatively cheap compared to the amount of money we give to charity. In the absence of that, what can the average person do? They should consider themselves a philanthropist. The institutional funders and the affluent have co-opted that term, so that when you talk about philanthropy you think you are talking about Bill Gates or the Ford Foundation and not the nurse who gives $75 out of her paycheck every month. But she's a philanthropist as well. And she should be--yes, when a disaster like Oklahoma happens, you don't have time to do a lot of research; you want to give $50 to the Red Cross, okay. But you should look, in the context of your whole life, at your philanthropic giving and ask yourself: What are the causes I care about deeply? What impact do I want to have on them and what organizations could help me have that impact? And go do some research, in the same way you do research before you cast a vote for President or in the same way as you do research before you buy a new washer-dryer. You have a right to go to the Pine Street Inn in Boston and say, I'd like to meet with your executive director. Or, I'd like to meet with your development director and get a tour of your facilities and find out how you are trying to end homelessness in Boston. People have to take some personal responsibility for their giving. They have to get off of this addiction to simplicity. Because ultimately the enemy isn't just the overhead ratio. It is our addiction to simplicity. And we run the risk, if we don't make that distinction, of trading one simplistic measure for another. And now you'll have charity watchdogs saying: We give them 3 stars on effectiveness. Well, how did you measure that? Well, we looked at their website to see what they say about effectiveness. Russ: We looked at their video to see if I teared up when I watched the video. Guest: Right. Russ: No, but I think you're right. I think we need--it would be great, it would be an entrepreneurial opportunity for somebody to create this organization that monitors charitable activity and gives real ratings based on not just what tugs on your heartstrings or overhead or other things, but whether they are innovative, whether they are trying to effectively solve problems they are trying to solve. In the short run, before that organization comes into being, I would argue--one of the lessons you are talking about is you tend to give locally. Because you know something about the organization; you know something about the people who run it, something about the quality. There are challenges if you want to give to a large national organization--it's very difficult to get that information right now. Guest: Yeah, absolutely. If you want to give to, say, Alzheimer's research and you are not a scientist. What we have right now are the watchdog agencies, the Better Business Bureau, Charity Navigator, Charity Watch. They have tiny budgets. The first two have a little over $1 million a year each; Charity Watch has like a $500,000 budget. People think they are these huge organizations; they are tiny. Between the three of them they have 30 employees. They don't measure effectiveness. And that's what we have in America for telling donors what's happening with $300 billion in contributions every year. |
| 40:56 | Russ: So it seems to me, one of the ways to move in the direction you are talking about is to go through the boards. So, most charities--it's a phenomenon I've noticed in my limited experience with these issues. I've been on the board of a few organizations. They have become, I would call it, more businesslike. Some of the things about that are good and some are not so good. But basically, boards of directors of charities, which used to be something of a rubber stamp, have in recent years tried to be more aggressive. They've tried to bring some sort of measurement to what the charity is doing. Again, I don't think that's always--measurement is better than no measurement as long as you can measure something valuable. If you start measuring things because you have to measure something, I think often people measure the wrong things and then incentivize the wrong things. But in theory, the people who can play the role of legitimate, real watchdog are the people on the boards who have some effectiveness, who have some experience with investment and advertisement, the things you care about. I think the challenge is that those people have the cultural mindset that you are fighting and are very uncomfortable bringing their entire business quiver to the archery game when it's non-profit. Guest: They do. They very much do. And organizations have a responsibility to train board members from the get-go and let them know what it is they really want from them and let them know what the culture is and what the goals are and how it is that they are going to get there. It's not--this idea that we want charities to act more like business is disingenuous and cruel. Because we're not for a moment ready for charities to use the big-league freedoms we give to business. A lot of people will dumb down my argument and say he wants charities to act more like business. That's not what I'm saying. What I'm saying is, you are putting the cart before the horse, is we don't give charities the permission to act like business and until we do we should stop preaching to them that we want them to. And we should absolutely give them that permission. But you are right--board members come in and they say, we're going to run this place more like a business. Well, what they mean by that is: we're going to draw more blood from the stone. We're going to do even more for less. Which is the opposite of how a business becomes successful. Russ: Have you worked with some boards to try to change their mindsets? Guest: Yeah, I have. I do a lot of speaking around the country. I'm speaking to a local United Way board next week; a number of YMCAs, CEOs; there are always board members at the talks I give. And they react extremely well to this message. They don't know any better. They were raised on the same religion as the rest of us. And people lead busy lives and unless somebody educates them, how are they going to know? Russ: You mentioned the United Way. I'm not a big fan of the United Way. I don't know if you want to weigh in on this, but I'm going to just mention this because I think they are an example of the problem that you are talking about. The United Way's selling point is that they economize on fundraising costs--there is only one campaign and they have economies of scale. The disincentive is once you are in the campaign you don't have to work so hard to attract donors. And I give all my charitable donations to individual organizations because I think that model, the incentive effects are awful. Guest: Yeah. I haven't thought about that issue in particular. I suppose it's a little like term limits, which I'm not really in favor of because it lays off the responsibility for voting on this automated system: Well, I don't have to vote because I know in two terms the person will be out of there. Yeah. I think it ties into the argument I made about a broken marketplace. It isn't operating on the kind of dynamic up-to-date information that the consumer goods and services market does. |
| 45:19 | Russ: Now, here's a question from EconTalk listener Justin Palmer, via our Facebook page; and I'd encourage people out there to like us on Facebook. Justin asks, "What about the charitable deduction? Should we keep it?" Given your encouragement of a for-profit mindset, do you think we should keep the charitable deduction? Guest: That's a big question. It depends on what we want to incentivize. If we want to incentivize more giving to health and human services charities, then I think we should. I think it's a way for the government to get services at 50 cents on the dollar, because they are losing $50 that they could have gotten in taxation but the donor is giving $100 to social services, so the government is up a net of $50 in services they otherwise would have had to provide to the tune of $100. But, I was reading Ken Stern's great book, Charity for All, and I had always been sort of unconscious about the distinction between non-profit and for-profit hospitals, and have always felt a little dumb because I didn't understand the difference. Well, after reading his book I didn't feel so dumb because there really isn't much of a difference at all. Russ: No, it's a sham. Guest: There is no difference. In that case, no there shouldn't be any tax exemption there if they are competing with the for-profit hospitals, and for-profit hospitals are actually providing a little bit more free care than the non-profit hospitals are. You have to ask about charities that run health clubs and things of that sort, where there is direct competition with for-profit industry. The Securities and Exchange Commission is not-for-profit, paid Grasso there tens or hundreds of millions of dollars or something. Russ: Large amount. Guest: So I think we really need to revisit that and ask ourselves what is it we actually want to incentivize. And limit the tax deduction to that. Russ: So, I really like your idea of imagining a world where charities advertise on Super Bowl Sunday, take out full page ads in the New York Times. You also talk about investment. What kind of investments are charities discouraged from doing now that they should be doing? Guest: Virtually anything other than capital investment in buildings and things. They are not investing their growth, because that gets labeled as overhead. That's the primary area. They are also not investing in their strength or their IT; they are not investing in their human resources; they are not investing in their talent, which is why you see high turnover, especially in the development field. It's one thing, it's bad enough to tell people we want you to work out of the goodness of your heart for two times, three times less than what you could make in the for-profit sector. And some people say yes to that. Oh, but on top of that we want to deprive you of all of the resources that you need to really capitalize on your potential. Now you've got a real losing proposition. Okay--I'm willing to work for less money, but I'm not willing to waste my life-- Russ: with my hands tied behind my back. Guest: Yeah, with my hands tied behind my back. Exactly. |
| 49:08 | Russ: What about--you talk in the book about the possibility of some kind of stock market or capital market for charities where donors could invest. Explain how that might work. Guest: I guess initially, because you can't own a charity--the state owns the charity--one way around that would be to create for-profit charities where you keep the feature of tax deductibility but otherwise there can be equity ownership in the organizations. So you are still producing charitable goods but you are not putting them at a disadvantage by stripping away the ability for donations to be tax deductible. And some people say--well, a for-profit company, tax deductible? Well, there's a difference between tax deductible and a tax exemption. They shouldn't be tax exempt. They should be taxed on their profits. But they should be able to deduct all of the expenditures on charitable goods and donors giving money should be able to deduct that from their taxes under the simple theory that there's no benefit inuring to the donor. They are doing something with the hope of social impact. That would actually be one way to create a real stock market for charity, make these organizations for-profit, in some cases. Another way to do it, in the case of the tax-exempt organization, would be create debt markets, so that I could put money into the fundraising of a particular organization with the promise that I'll get 20% back, or 70% back because it's a high risk proposition. I don't own any equity, but I'm getting a high interest rate on the debt that I'm financing, that I'm making available. Russ: And I think to make that practical, you'd have to have it be some kind of standalone event. Because money is fungible. Money can cut across different activities. So, if you were doing, let's say I invested in the Pallotta Teamworks concept of a 3-Day Ride. I'd be lending you money for all the overhead you put up, all the investment you had to make in the tents and the food and the people, etc., before you had any donations coming in; and then you would pay me back a competitive rate of interest on that. Guest: Yeah, exactly. Russ: That would work. Guest: In the case of the Breast Cancer 3-Days, we launched that with a $350,000 investment. Over the course of 5 years it netted $194 million. So, we could have paid Venture Capital [VC] rates. If somebody said, I want 10 times my money back--okay, $3.5 million at $194 million net? Done. Russ: And the tragedy of that is how many events like that aren't taking place because they can't do that. Guest: Exactly. Yeah. Eventually we were able to get bank financing for our events because we were doing a lot of deposit business with one particular bank. You said you might have to limit it to one particular event. Not necessarily. A donor could say: Here is, whatever--AIDS Project Los Angeles, we raised $20 million for the year; they have a $2 million a year fundraising operation. I'm going to put $2 million more into their fundraising operation and I want a return of x percent on anything in excess of 10% growth in their fundraising department. And if the charity thought that's fair and that accurately assesses what our growth would be without the investment then they could offer a return on the whole development department. |
| 53:16 | Russ: So, you have a great book; you have a great TED talk. A friend of mine just saw it; he's on the board of a charity and they all watched it and talked about it. You're causing, by yourself--I'm sure there are a few people who agree with you, but in general it's a little bit of a lonely effort you are involved in, right? There's something heroic about it, given this cultural barrier that you are trying to bring down. Is it a quixotic effort? Are you tilting at windmills here? Do you think we can move in the direction--let me say it differently: There's a lot of pro-capitalism stuff in your book, which jumps out, I think, at some readers. I love it, but some readers go: Whoa, whoa, I thought this guy liked charities; and he loves capitalism. So we have a cultural problem with capitalism already. You are suggesting we ought to embrace that and bring charities into that world. Which, I'm all in favor of as long as we let people take losses--that's real capitalism, not the crony kind. Can we get there from here? Do you have some optimism? Do you feel like there's some traction for your ideas? Guest: Yeah. There's this great quote by C. S. Lewis: It's not that Christianity has been tried and found wanting. It's that it has been found difficult and so has not been tried. And that's true of capitalism. We haven't tried a pure methodology of capitalism. And the evidence of it is that we don't use it in this charitable sector. If we did then we could start to not demonize capitalism; but we could beat capitalism at its own game. You use capitalism to promote love. Do I think we can change this? First of all, it's a paradox, but people in the sector, and very left-leaning, liberal people in the sector, get it. They toil all their lives and they see they are not having any impact and they are under enormous pressure to produce results with no resources to do it and they are absolutely fed up with it. They voted for Barack Obama and they have Nancy Pelosi bumper stickers and they love Uncharitable. You know. It is and it isn't a paradox. I have no doubt that 75% of the sector is behind it and wants to see change and recognizes this is an idea whose time has come. We are operating off of an ethic and off of a system that has religious roots and that is 400 years old and doesn't work any more. We need to change the way the public thinks about it. Okay, well that might be where it gets quixotic, one would think. I don't think so. I think you can change the way the public thinks about these things and I think you could do it very quickly. You can look at examples of it. Look at the way the pork industry changed the way people think about pork from a fatty heart-attack waiting to happen to 'the other white meat.' Or the way the egg industry changed the image of the egg as a high cholesterol food that was bad for you to 'the incredible, edible egg.' They just got methodical about it. The non-profit sector has remained utterly silent about these issues. It has no anti-defamation mechanism like other communities have, so it takes punches to the face in the media all the time and doesn't respond. It has no legal defense fund mechanism the way the Mexican-American community, the African-American community, the gay and lesbian community do, so its First Amendment rights are constantly trampled. It has no, you know, pork-the-other-white-meat advertising campaign where it actually tries to tell the media what overhead actually is. And it doesn't organize itself. There is no database where all 10 million people who are employed in the non-profit sector are listed and you could punch a button in order to get them to advocate on behalf of themselves. So we just need to do those things. And I'll tell you where my faith in the ability of us to change this comes from. One thing, like if we could change the way people think about pork, we could absolutely change the way they think about charity. But secondly, I happen to be gay. And I'm 52 years old now. And when I came out to my parents when I was 21, they were totally depressed and they thought: you'll never have a normal life and you'll never have a family and you'll never have children. Well, it's 30 years later; I'm married to a wonderful man that I've been with for 12 years; I have three beautiful children; they are our own biological kids. I could not have dreamed that that kind of change would have happened in the United States in the course of those 30 years. But it has. If we can make that kind of change on something as polarizing as gay rights and gay marriage, we can absolutely get people to think more rationally about charity. |
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| 0:33 | Intro. [Recording date: May 13, 2013.] Russ: A lot of people argue that the Internet has empowered the powerless; and there's a lot of evidence for that. But you accept the point and add, well, it's also empowered the powerful. How has that happened? Explain. Guest: Well, it's interesting. When we first got the internet it was very quickly cleared that the powerless, the unorganized, the disenfranchised were able to use it to organize, to gain power. And we saw this from the banal to the important. We saw it in Wikipedia, in internet chat rooms or web pages for every activity or interest or proclivity, that you could quickly find people like you and organize. And this also worked for political movements. We saw President Obama use the internet in an unprecedented way. We saw the Arab Spring, where in countries like Egypt and Libya, dissidents used the internet to organize and to push for political change. And that worked. You saw a lot of writings in the 1990s that talked about this. In 1996, John Barlow wrote this great document, the Declaration of Independence of Cyberspace. And he said something like, to governments: You can't rule the internet because you have no ability to control it. It was a utopian dream, and we kind of all believed it. What we didn't realize is that more broadly, the internet technology magnifies power. And if you have power already, it will also magnify your power. But it happens slower. Right? Governments are institutions; they don't move as fast. They have bureaucracies; they have ways of doing things. And it really took them 10-15 years to figure out the Internet. But now we are living in a world where the power full use the Internet to increase their power. So, the National Security Agency (NSA) use their power to spy on people. The Chinese government use the Internet to spy on people. The Libyan government uses the Internet. Large businesses are using the Internet to increase their power. And it's not just Google and Facebook. It's things like big media, and the movie industry is using it to crack down on file sharing. So, we're seeing a broad increase in the people and the institutions using the Internet to increase their power. And it's a little bit of an open question of where this balance will end up, between the powerful and the powerless--which one will benefit more and who will end up with the upper hand. I mean, we know about from history, different technologies will perturb things. We're not sure what will happen in this case. Russ: So in a recent podcast we did with William Bernstein, he gave an example of the radio, which is a fascinating example, how the radio was originally used by tyrants to spread propaganda by the oppressor to keep the oppressed oppressed. But eventually the oppressed were able to use that technology to liberate themselves by being able, in the case of the Soviet Union, to listen to Radio Free Europe; to get information and other broadcasting information about the world that they didn't otherwise have. And certainly one of the most important parts of the Internet is to allow me, as a citizen, to get information about what is actually going on. Just some measure of the truth. And totalitarian governments' control of that information is extremely important. So on the surface you'd think the Internet has made it much harder for tyrants to control that flow of information. The only thing that worries me sometimes is that the Internet would get cut off, or highly censored by the powerful, and keep me from that flow of information. Is that something I should worry about, either in the United States or elsewhere? Guest: I mean, it certainly is. And it's not just governments I would worry about. Companies' doing it as well. You know, it's interesting. If you think about Internet control, there are several levels of control you could have. The best level is fine-grained control, where you can selectively censor, selectively monitor, add and delete messages. If you can't do that, the next-best thing you can do is to eavesdrop. You can just passively eavesdrop on everything. And if you can't do that, then the next-best thing is to destroy it. To shut it down. And we'll see governments doing all those things, depending on their technical capability. I worry about not just government censorship--which is obvious to see. You see it in China--the Chinese do a lot of censorship. And there are censorship projects which monitor countries and censorship. And you see more of it every year. I happened to be in Saudi Arabia last week and the Internet was heavily censored. I couldn't get to either porn sites or the Jerusalem Post. And more countries are doing that. Also you have to worry about, not really censoring, but message control from companies like Google. We know that your Google search results are dependent on part on your personal Google history. The kind of things you see depend on what you've asked for and looked for in the past. So your Internet in some way censored, not with a political agenda, but with some agenda that you don't understand. So, a paper published a couple of weeks ago that looked at the possibility of Google tipping a presidential election--and it was sort of interesting, it was a psychological study, a thing that--we know that people's impressions depend on their past experience--this was a question, was: Can you modify someone's impression of a political candidate based on the sorts of answers you show him? And the answer was: Of course. Russ: Oh, yes you can. Guest: Of course you can. So, you can have a situation where Google, or a company in that position could decide, for whatever reason, to show more positive articles about Candidate B, more negative articles about Candidate A. Given where we live in the United States in a country with a very slim margin between the two parties, it doesn't take a lot to shift a small number of people, and therefore the election. And what the article said is not that Google would do this, but that they could do it. And, which I think is interesting, that it wouldn't even be illegal. It would be a perfectly legal thing for them to do. This is a corporation providing a free service. They can do it however they want. There is nothing to say that they have to only show balanced articles, or a balance of articles for any particular candidate. So Google could tip an election. [?] asked. Which is a very different question, which is: Does that mean that search should be regulated? And made more transparent in our country? That is, that it is too important to be opaque and a trade secret. |
| 8:33 | Russ: Of course, some people would like it that way. They'd like to get biased results, which is why they visit certain websites that Google would have noticed, etc.-- Guest: But they want biased results in the bias they want. Russ: Of course. Guest: This would be an example of biased results in some hidden bias you don't know what it is. Russ: Sounds like the good plot of a movie. Guest: It is. But you could see the same thing in advertising. What happens--I'm just making this [?]--Coke pays Google some amount of money to show better articles about Coke and worse articles about Pepsi? Perfectly reasonable business model. One we don't believe Google is engaging in right now. But they certainly could. And here it wouldn't tip an election. It would tip a market. Russ: Of course, we know we don't have to worry because Google's motto is 'Don't be evil.' [sarcasm--RR]. So there's nothing to worry about. That is very interesting. And I think, obviously, as you said, this is legal right now. Search engines, I'll call, 'proclivities', their proprietary algorithm--now if that came out it, I think it would be devastating to Google. It might not make it hard to come out; they could maybe cover it up. But I think what right now regulates that behavior is the impression we have--which may not be true--that if they did that it would be very costly. Guest: But we know that as regulation goes, that would be pretty crappy. I mean, we know that again and again, most recently in the 2008 financial crisis--that 'if this ever gets out, we'll be in trouble' is a really, really bad regulatory regime, and not one that's going to work-- Russ: I'm not so sure. Guest: and nothing resembling reasonable. Russ: I'm not so sure. That would be another topic. It actually works quite well most of the time. Guest: The problem is, 'it works quite well most of the time' is actually very bad. Since you have such major things. But I think-- Russ: I think the reason it fails has to do with other forces, not due to the basic idea. I think the basic idea is that your brand name and your reputation are quite powerful and important self-regulatory mechanisms. They are limited. I'll agree with that. Guest: But remember the whole corporations are people thing. You forget they are actually not people. It's not a corporation saying, say, My brand, Coke, is important. It's a guy saying, I'll get a bonus in 8 months if I do this thing; and when everything just completely explodes, it'll be someone else's problem. There's like--the incentives get very skewed. I mean, you have this weird corporations are people kind of feeling. Individuals making decisions, that affect larger entities. Russ: Agreed. Corporations usually have an incentive to monitor that misbehavior. I would argue in the financial sector we took out the natural forces that would give them that incentive, and they didn't monitor it; and there are a lot of people, a lot of rogue activity and rogue decisions that were made that were very destructive. But my argument is that we've destroyed the natural feedback loops that would have encouraged that to stop. Just to take an obvious example, if you were spending your own money, which they usually are not, they would have acted very differently. And the reason they were able to spend other people's money, partly because I think a failure of a different part of the regulatory regime. Guest: It depends who the 'they' is. The 'they' is someone in a corporation getting a salary, so he's never spending his own money. He's spending the money of his employer. Russ: That's true. Guest: There's no such thing as the corporation spending it's own money. Because it can't do that. The verb 'spending' only applies to human beings. Russ: Well, that's true. Guest: A building can't spend. People in a building can spend. And I think that's the confusion that I think people just miss a lot. Because it's a convenient shorthand to say, 'General Motors did this.' As if General Motors could do something. Russ: That's correct. It's a shorthand. It's often misleading, or uninformative. And the example that I'd like--I'm sure one of us will use it at least once during this podcast, is the word 'we' to describe something done by the government or the United States. Which is the same problem. |
| 12:45 | Russ: I want to go to a different issue that you just touched on a minute ago, which is eavesdropping. You talked about how the powerful would like to manipulate individual fine-grained messages, fine-grain manipulation like throwing them out, etc. The next best is eavesdropping. How much eavesdropping is, do you know of, that's going on in the United States right now? Guest: A lot of this is secret, so we don't know. We do know that Google eavesdrops on everything you do. Facebook eavesdrops on everything you do. If you are browsing the web, there are tools you can use; and there's one tool called Collusion. I was reading some report, I think from New Yorker, was monitoring a tool and he found that 130 companies were eavesdropping on him as he wandered the Internet. So there's an enormous amount of eavesdropping built into the business model of the Internet. So that's one half of it. Second half of it is government eavesdropping. And really, we don't know. There's a belief that the National Security Agency (NSA) is eavesdropping on as much as they can. By law they are prohibited from eavesdropping on Americans, although that has gotten very fuzzy. We're not very sure what they are doing. They are building a large data center in Utah, which seems to be to collect, basically, what people are doing on the Internet so they can search it in real time or search it backwards in time. Exactly what they are collecting, we don't know exactly; how they are collecting we don't know. Now, the NSA eavesdropping on phone calls, that was a big scandal a few years ago. Other countries openly say they do it. Like, China, it's no secret they eavesdrop on the Internet. And the disturbing thing is that a lot of the tools go back and forth. So, tools that are built in the United States to facilitate corporate eavesdropping--so, for example, you might work for a large corporation and they don't want trade secrets leaving their network, so they put in something called data loss prevention, which is basically eavesdropping on what people are sending out of their particular accounts to make sure no corporate secrets are being leaked. That same technology can be sold to countries like Egypt to do the same thing to eavesdrop more generally. And there is this back and forth between government power and corporate power. And the same tools are doing both. Because exactly what happened to the United States, we know that we eavesdropped all the time at corporations--and government does get access to that data, either through warrants or through agreements. Sometimes they ask nicely. And again we don't have a lot of solid information about this. And also direct government eavesdropping. Russ: So, in the Boston marathon bombing, a set of surveillance technology was used to apprehend the bombers, or to identify the bombers. The alleged bombers. And some of that I assume was private. It was private in the sense that it was crowd-sourced--photos and videos that people at the time took. There were also surveillance cameras that were from local companies, Lord & Taylor supposedly had a-- Guest: And the willingly gave it to the government, perfectly reasonable--here, use this, see if you can find anything. Russ: And the government has its own surveillance cameras in certain places; I don't know if they were in that spot, but I think I'm right that in certain spots in the United States there's government surveillance cameras. And these give me the creeps, personally. Guest: Which ones? Both, I hope. Russ: Well, mostly, again the government ones, because it's much harder for me to opt out of government mistakes than private mistakes. Guest: Actually, it's not true. You cannot opt--let's go back to Boston. Russ: Sorry. Let me choose a different vocabulary. If Lord & Taylor took, say, ugly photographs--meaning photos of people making awkward faces, embarrassing clothing, whatever it was--and put them on the Internet for entertainment, people would get upset and some people would stop shopping at Lord & Taylor. It's a lot harder for me to leave the United States. That's all I meant by 'opt out.' I apologize--it was sloppy vocabulary. Guest: Yeah, I don't know. I guess I really dislike the: if government does it it's bad but if a corporation does it, it magically becomes good. Russ: I didn't say that. Guest: Yeah, but if a company decided to post embarrassing photos of people--I'm going to make this up: Lord & Taylor hires some guy to walk around Boston taking embarrassing photos. And some people won't shop there. Some people will shop there twice. Russ: Well, maybe. Guest: But the people who are having embarrassing photos taken have no say in this. You can't opt out. It's just as hard. Russ: I don't have any problem with legislation or laws that prevents people from using my picture, my work, or aspects to humiliate me or invade my privacy. I don't disagree with you there. Let's take a different word. Let's take censorship. So, if somebody's listening to this right now and they want to write an angry, obscene, and rude comment on this EconTalk podcast, we censor those. I don't like that word, and I won't use that word--we moderate and edit the comments to this podcast. Guest: I do the same thing on my blog. You must maintain a civil tone. You can disagree but just don't be a jerk about it. Russ: Correct. And people will often accuse us of censorship. And I want to reserve that word for the use of the power of the state which has a monopoly on coercive power--it can arrest me, put me in jail. I want to reserve that word to mean the control of information by the central authority. Now, I'm not going to disagree with you that sometimes, eavesdropping, private or public--or let's call it corporate or government--can be bad on both cases. But I don't think they are the same. Guest: Okay. I don't know. This gets into--there's probably a different argument that I'm not really equipped to have right now. They are closer than I think a lot of people think. This is the great libertarian fallacy, that it was a really good idea back in the mid-1700s that power is dangerous and we should look towards a society that equalizes power. But I think what that philosophy missed over the past few hundred years is that power has shifted. That is not just government power. That corporate power, in some ways, is a lot more powerful than government. I was reading this great book called Power, Inc., which talked about the rise of corporate power, and the points the author makes is that, imagine a climate change legislation: who do you think have more power--Bolivia or Exxon? It's not even close. Who has more power--the United States or Exxon? Well, it actually is close, and we're not sure. The nexus of power on our planet has shifted. And if we care about liberty we can't ignore that. It is, I think, just as hard to leave Facebook as it is to leave the city you live in because you don't like the government. Russ: Yep. I want to come back to that. Guest: It is so--these technologies are so pervasive and so embedded. Try living without a credit card. That's really, really hard. And unless credit cards compete, or whatever feature we are complaining about, basically we have no choice. And this to me is the interesting thing about power and security: how we find those in power, whether in government power or corporate power, are using security, using the Internet to solidify and increase power. And a lot of my main worries are when the two get together. Russ: We agree on that. Guest: If you think about it, there are two types of law in our society. There's Constitutional law, that constrains government. And there's--I don't know what to call it--regulatory law, tort law--that constrains corporations. And what we are seeing is that both groups have learned to bypass their limitations by using the other's law. And I think it's very dangerous. So the government is using corporations to get information it can't get otherwise. To get around limitations on what government can do. Really important limitations, they are going to corporations and getting help. Corporations, who are prohibited from doing certain things, are going to government and getting help. So, the movie industry tries to get government to pass a law to enforce its business model. That's something that seems like an absolute disaster. So, it's this back and forth that really worries me. |
| 22:35 | Russ: I absolutely agree with you. And I think the main reason that Exxon is more powerful than Bolivia is that they've figured out a way to use the political power of the U.S. government. Guest: Right, they hacked it. Russ: Their economic power is very limited because I don't have to shop there. And that's the part of competition that's-- Guest: There's a lot more to economic power than you having to shop there. The externalities are enormous. And whether or not you shop there, they actually couldn't care less whether or not you shop there. It's not going to matter to their power. And it's much bigger than a country. Russ: Well, if nobody buys Exxon gasoline they are not going to have a lot of power. Guest: Yeah, but most people don't care. And they know that. Russ: Well, let's get to that. The question is: Why don't they care? I brought up the eavesdropping and the surveillance, and I brought up the Boston bomber--we got off on a digression there, but the reason I brought it up is that--I talked about the different kinds of surveillance that took place to identify the alleged bombers. We had people taking cell phone photos and regular photos, and we had surveillance photos from Lord & Taylor and other shoppers; and we could have had--I don't know if we had it in this actual case--government surveillance cameras. And I mentioned that they bothered me. You said I should be bothered by all of them. Perhaps. But the point I want to make is that most people aren't bothered by any of them. And in particular, this kind of case, where the case was cracked--it seemed to be; we don't know, they are the alleged bombers--but the suspects were identified very quickly--is going to encourage a lot of people--not me--to say: This is great. We have to have more of this. We have to have more surveillance, because we have to make sure that people don't get away with things like this. And so, I wanted you to talk about the role of the average person's lack of concern, which is what you were alluding to in this last comment, in facilitating this kind of increase in surveillance and eavesdropping. Guest: Let's take a more general question first. Yes, there's a lot of lack of concern. And the basic reason is diffuse versus concentrated interests. When you, me, anybody go about their day, we have a million and a half things we have to worry about. And Facebook eavesdropping and government surveillance cameras--all of those things are piled up with, I have to drop something off at the Post Office, and go grocery shopping. And it's very hard to get riled up about one particular issue because we've got so much to do. Meanwhile, on the other hand, the U.S. military, Google, Microsoft--they all have lobbyists. They all have people whose dedicated job is making sure their interests are being pushed. And it is extremely hard to deal with that imbalance. So, you have police that say: We love cameras. We get to sit in our police stations; we don't have to go outside where it's cold; the cameras do all the watching; and look at all this cool high tech. You have a camera industry that pushes all of this, that pushes cameras in schools--here's some free cameras, let's get people used to it; here's some great camera success stories. So, there's money in cameras, there's power in them. And that's hard to array against the general populace that's just busy with a hundred other things. Now, if you totaled up, I think, the anti-camera sentiment, it would be greater than the pro-camera forces, but it's just so diffuse you never get a chance to total it up. And that's fundamentally a problem. Russ: Isn't the other factor--it's a great point about I've got a million things to do and they're kind of focused. I think that's a general problem in legislation. Guest: In everything, right. Russ: And how it gets steered toward certain interests. But isn't it also that most people don't even see it as a negative? It's not that they are not aware of it. They see it as--I don't have anything to be ashamed of, I have nothing to hide, what's the big deal; the government is going to find the bad guys, and I'm one of the good guys. So I shouldn't worry. I think that's most people's attitude. Guest: I think there's a lot of that. I mean, there's a few things going on. The first is fear. When someone is actually afraid, they'll do pretty much anything not to be afraid any more. And if they are told: terrorists, terrorists, terrorists, fear, fear, fear--I know, we'll save you: Cameras. They'll say, great, save me. Read my mail, put cameras in, make sure there are no spectators at any marathon between now and the time--whatever dumb thing you are going to do. Just do it and make me feel safe. And because that message is being pushed--and it's a propaganda message--by government, by police, by the vendors of whatever technology is being sold-- Russ: Equipment. Guest: Right. And people not knowing better will believe because it sounds plausible. Cameras caught the bad guy, therefore cameras are good. We can argue whether cameras did catch the bad guy, and it's not obvious to me that they did. Or at least that the bad guys wouldn't have been caught otherwise. That cameras happened to catch the bad guy or were cameras necessary to catch the bad guy. Necessary is the important question. But this is a subtlety that is going to be lost in an average conversation. So the first thing is fear. The second thing is privacy, like any right, you tend to only notice it when it's gone. Russ: That's right. Guest: It's easy to say, I have nothing to hide. I'm asked that pretty regularly on the radio. And when someone says I have nothing to hide, why do I care? I'll say: What's your salary? And they'll say, um, um, um, um; and I'll say: See? Russ: And that's an easy one, too. Guest: Because something to hide isn't about illegal activity. It isn't about something I'm ashamed of. It's about how you present yourself to the world. It's not about secrecy versus non-secrecy. I will go to a doctor and take off my clothes, but it doesn't mean I'll do that-- Russ: on Facebook. Guest: On Facebook. And it's not because I have something to hide. It's because it's a different context. And our notions of privacy are very complex. And there's also, I think, a belief, and this again you don't notice till it's gone, that the powers are largely benevolent. Of course you don't care if the police read your email, because what do they care? And it's only in those scary regimes of the middle of the previous century where the police state did those nasty things. Except that is not true. It's true today in certain countries. And you and I know that when you give power--and this is actually true for government or corporate power--when you give power to an entity, you will have abuses. And the more power, the more abuses, and the more potential for abuses. And this is why you always temper power. That is also a very subtle argument. So, I think the basic reasons are multiple: that when people are scared, they're willing to not be scared; that the privacy arguments are subtle and hard to understand, and the negatives from lack of privacy you only notice when you are missing them. So that's the real combination that makes this a difficult conversation. Russ: Yeah, and then I think you get to a--you are on a slippery slope potentially. Right now, we are in the middle of a--I don't know how serious a scandal it's going to turn out to be, but there is now some evidence that the Internal Revenue Service (IRS) may have used political considerations in investigating various tax-exempt organizations. Guest: And those accusations are--I mean, how old are they in our country? A century? More? Russ: Sure. Guest: Every time. Power is tempting. You are sitting there, you are in power, you have this lever. It's going to be really hard to say, that would be wrong. Because you are skewed. You are doing it for what you believe is some greater good. This is the same reason we are torturing people. We were blind to that it was a really, really bad idea. |
| 31:33 | Russ: So, let's talk about this corporate issue. You put it in a very interesting way in a recent essay. You talked about feudalism. And again that might be a little over-dramatic, but why don't you describe what you mean by that and flesh out some of the points you were making earlier about how we depend on Facebook, Google, Amazon, etc. Guest: This is sort of an effect of the way technology is moving. We're are moving toward less control over our stuff. We are putting more and more things in the cloud. And this really has to do with the cost of data storage versus the cost of data transport versus the ease of access. Now it turns out for most people to put their email on some cloud provider--let's say Gmail or Hotmail; to put their photos on Flickr or some other photo app. Russ: Dropbox. Guest: Google docs, address book somewhere, calendar somewhere. This is just a lot easier. Russ: It's fabulous. Guest: Oh, it is absolutely fabulous. All these things are being done for really good reasons. At the same time, we're losing control over our consumer devices. So, if you have an iPhone, you have a lot less control than you had over a Windows box. For an iPhone, all software has to be approved by Apple; it's only sold out of the Apple store. Updates are approved. If you have a Kindle you don't even have a choice whether you can load an update--it happens automatically. And basically an observation is that people--and I see this in my friends--pledge allegiance to a particular company. So I have a friend who has a Google phone. And she has her calendar on Google, and her email on Google, and her address book. And it's all fantastic. It works great. But she is essentially-- Russ: She's a vassal. Guest: She's a vassal of Google. Other people can do the same thing to Apple. Microsoft is trying to get in that position, to be the one stop shop for all of your stuff. And at those points, we are vassals--probably a good word--or serfs depending on the way you want to take the metaphor--of these companies. And the reason I call it 'feudalism' is that those companies don't necessarily have your best interests at heart. In a lot of cases you are not even their customers. They are offering you this service because they want you as part of their product they sell to their customers. So they are enticing you into their system to give them all of this data and information that they can basically sell behind your back without your knowledge or consent. In theory you know, but you ask most people, no one's going to read the agreement they are supposed to agree to. Russ: Never. Guest: And a lot of people don't actually know. And when I look at feudalism--there's a really interesting article, I'm not sure I buy, but I'm going to present it because I think it's really interesting. I was reading a book, Rebecca MacKinnon, Consent of the Networked. She didn't use the feudal metaphor. What she pointed out is that, you know, back in the feudal era, powerful--and these were essentially governments, these were lords, had a lot of rights over their vassals and serfs. But basically no actual responsibilities. They could renege on their agreements all the time. If you watch Game of Thrones, you see how it works. When anything bad happens, the serfs get completely pummeled. They have no rights and they are just collateral damage in these large battles that are happening. And it took the Magna Carta, where the serfs, the people got to say: Hey, you governments, you don't just get rights; you have responsibilities as well. And right now, with these large companies, these Apples, Googles, Facebooks, it's very much the same thing. They have rights but no responsibilities. They can do what they want. And your only recourse--and it's made literally hard to do--is to leave. If you wanted to leave Facebook, you can't take your data with. You can say: Here, here's all the stuff I've given you to date, and I'm going to walk away. Although depending on what social group you are with, that's actually very hard--you don't get invited to parties any more, you lose all your friends. The network effect and the lock-in in so great that often being able to leave is more illusionary than real. The social penalty is enormous. And of course, these companies count on that. That's part of the deal. That's why you try to be so big, so it's so valuable for someone to be there. And the idea is: Do we need something Magna Carta-like to force these corporations to have responsibilities? So, you see some of this in Europe, that there is a right to inspect the data that they have about you. A right to be notified if it's being sold to a third party. The right to delete it; the right to take it with you when you leave. Now, I can make up some of this stuff that sound plausible, and do we need to establish these rights against these new nexuses of power that have emerged, and are highly coercive, and in some cases highly abusive; and in all cases a high potentially abusive? Russ: I don't know if I want to agree with the coercive part. Guest: Yeah. I guess [?]. I get that you wouldn't want to agree with that. Russ: I heard you hesitate there. But it's certainly true that there are large costs to leaving these fiefdoms that we've embedded ourselves in. We've chosen to embed ourselves. I think the biggest difference between the--the problem with the metaphor is that there weren't that many vassals who wore a t-shirt advertising how great their feudal lord was. The fact that people wear t-shirts and love being part of these groups suggests that, as you say, it's convenient; right now, it doesn't seem to be abusive. It may be right now and it certainly has the potential to be--I agree with you there. And then I have this worry that as we through the government, that issue you raised earlier is going to come to the fore, which is the ability of the players to manipulate that system. I prefer an end around. Let me just suggest a couple of ways we might get to a different world. One is that you could start a company that had a different set of default and opt in options. Guest: Well, be careful. Lock-in is a big deal. Russ: Oh, I agree. Guest: You could start a competing Facebook, but if nobody's on it--we're back to most people don't care most of the time. Russ: Right. Guest: I'm not on Facebook, because I'm a freak. But this is increasingly hard. I remember many years ago, I would have regular parties--I would send postcards to friends. And there was a time when I swapped from postcards to email. Pretty much everyone had email. And there were a few people that didn't have email addresses back then, and I would have to remember to send them a postcard. And I would invariably forget. So those that weren't on that technology effectively stopped being invited to my stuff. Not on purpose. Russ: I understand. Guest: Because that's the way the world works. These days--I'm noticing that I'm not being invited to things because I'm not on Facebook. There is a social penalty not being on Facebook. Insert[?] DuckDuckGo.com is a competing search engine, and their business model is: We do not collect your data. They are very nichy--because we are back to most people don't know the problem, most people don't care. And because they are so nichy, they are getting less revenue; their search engine is less good. The powerful accrete power, and it's hard for an upstart to break in. It's not an easy competitive market like building chairs in an open air marketplace. Russ: Right. But don't you think it would be easier for DuckDuckGo to gather customers if Google becomes more abusive? Guest: Maybe. It depends. It depends whether it's publicized. If Google is in charge of getting people to read articles of how abusive Google is, then maybe not. There is a lot of stuff going on here. Russ: It's true. Guest: If we ratchet it up slowly, people aren't going to notice. There's a lot of ways to play this game. And there's sort of another thread that we could pull in--that we as a species, as science, are getting so good at psychological manipulation. We are putting people into brain scanners and showing them political and advertising messages. And measuring how good the results are. We are getting so good at manipulation that persuasion, whether it's political persuasion or economic persuasion--buy my product--has gotten to the point where it's almost an unfair trade practice. So I'm not sure we have a clean market here and a better produce rises or the better candidate rises to the top. Russ: It's imperfect. Guest: It's a scarily imperfect market at this point. |
| 41:44 | Russ: Doc Searls, in a recent podcast we did on his book, The Intention Economy-- Guest: Great book. I enjoyed reading it. Russ: Fascinating book. So, he wants to create a world where buyers signal their intentions; sellers compete for those intentions. He wants a world where we control our data; that's the default rather than the opt-in. Given how worried you are, concerned you are about these issues, given how relatively unconcerned the average person is--I'm somewhere between you and the average person--how do we get there from here? Other than the regulatory strategy, which is not what Doc Searls is pursuing, I think. Different business model. Guest: Yeah, he's pursuing a market strategy. What he's saying is: Look, I can build technology that will empower individuals by putting them in ad hoc groups. It might [?] be very much about the buyers' clubs--those in Japan; they turned into what Costco and companies started like--that buyers would aggregate and give themselves more power. And I think this is great. I think his idea that you can do this with technology is very clever. And if he can, it would be great. I would worry about a backlash. Think about Priceline--had this idea when they started: we're going to let buyers name their own price. And that turned into: We're going to sell tickets on sale and pretend buyers name their own price. But maybe the technology wasn't there yet. Because what Searls is talking about is a more nuanced, clever technology to aggregate demand and to allow buyers to establish their contract requirements so it's not just a one-sided here's-your-clickthrough agreement, you either can click or not. That there could be actually some negotiation. And this would happen by agents automatically, so it would scale. There's a lot of great stuff here. So this certainly could work. I like hearing him speak; I'm cautiously optimistic about what he's doing. Here's a way that technology those with less power to get more power. I think you are going to have the powerful fighting back. Let's take an easy instance--the airlines. The top four airlines say: Well, we're not going to use that system. Suddenly you can either fly on a minor airline that's inconvenient, doesn't get you there; or you can't use it. So, if you have a small number of dominant players, they could fight back, they could somehow regulate this tool out of existence. And I don't know how they'd do it. We see this with small agriculture--big agriculture gets laws passed that really hurt small farmers because they don't want the competition. Russ: It's not just agriculture. Large firms love regulations that raise the cost to all firms. Guest: That was just an example. Russ: Because the smaller ones have trouble competing. Guest: So, I would worry about fighting back, using both corporate and government tools. It is a good--here's a great example of how the Internet can change a power balance. But what remains to be seen, when all is talking about how different groups are using power, is where the balance ends up. Early on you talked about radio. Actually, radio started as completely decentralized, completely for the powerless, co-opted by governments because of limited spectrum; and they had a whole bunch of reasons why they had to control the air waves. In certain countries they controlled it even more; it became a propaganda tool. But it also was a tool of empowerment, of bringing, you know, Radio Free Europe, bringing messages to people who didn't have them. So, when you look back on the history of radio, you probably could trace how radio affected power balance and where it ended up. We're at the early days of that same graph of the Internet, and where it's going to end up--I kind of want to say it's anybody's guess. Maybe I'm giving short shrift to how much we can predict, but it seems really hard to me. So the early days of thinking about this. But all of these things; it's going to be back and forth; it's going to be the powerful using their power to keep the status quo as much as possible; the powerless being nimble, trying to do end runs and run arounds. It's really interesting to watch. |
| 46:32 | Russ: I agree. To me, the other issue that's fascinating how the balance is going to work out is how much people care about it. And I think that is even more important in how we look at terrorism and security issues there. I'd like to use our last few minutes to talk about that, as you've said so many interesting and provocative things there. You've been very critical of how we have used our resources to fight terrorism. What are the major mistakes you think we've made there? And again, as you pointed out earlier, a lot of these mistakes are driven by fear and preferences of the average American who is not particularly worried about the abuse of power right now. That could change. It's starting to change. I think there's a bigger awareness of it. But the combination of fear and a trust of what the government does has engendered a lot of practices that seem to me--and you've pointed this out--that are not very effective. Guest: So, I'll talk about two major mistakes. I could spend an hour on this topic. The first one is we over-exaggerate the threat. And in a lot of ways this is an effect of the psychology of terrorism--that it's big, it's spectacular. The media repeats it endlessly. And in our brains we think it's a much larger problem than it is. We don't say things like: well, every month a 9/11's worth of people die in car crashes in the United States. We don't say that pigs kill more people than terrorists every year. We believe terrorism is this huge problem and needs an inordinate amount of security and spending to mitigate. So I think that's the first thing we get badly wrong. The second is that we worry about the specifics of what happened rather than the generalities of what could happen. So, we worry about terrorists taking over airplanes with box cutters. I mean, right now we're worried about finish lines of marathons. It's almost magical thinking, that we somehow have to secure the finish lines at marathons in this country. Because that's what the terrorists did last time, and obviously that's the place of worry. We see this in airplane security. Think of the history. We take away guns and bombs, they use box cutters. We take away box cutters, they put a bomb in their shoes. We screen shoes, they use liquids. We take away liquids, they put a bomb in their underwear. We put in full body scanners, they are going to do something else. Again, this overly specific focus on the details of the plot rather than the broad generalities. Those are the two major mistakes. Russ: I will say--I did fly yesterday, and I got to keep my belt on. It was a big day. It's one of the strangest--it's this strange form of theater, that if I take off my belt and my shoes for 30 seconds and let them pass through a metal detector, I'm somehow going to be safer. They should just have an incantation. You made a fabulous point in the aftermath of the Boston bombing that resonates with a lot of themes in this program, which is: after every event like this, and it's true of natural disasters as well, but it's particularly true of terrorism, there's always signs that were missed. And people then--there's recriminations--the phrase you used, which I love, which is: People complain, why didn't we connect the dots? What's your answer. Guest: Well, that it's a crappy metaphor. The connect-the-dots metaphor--you know what a connect-the-dots picture looks like. There are a bunch of dots; they are all numbered; you connect them and you've got a picture of a duck. But that's not the way intelligence works. Intelligence is, you have a million pieces of information; they are unnumbered; you don't know if any of them mean anything; and you are supposed to pick a terrorist plot up out of it. It's a very different analysis. And getting back to psychology, there is something called hindsight bias. That we as people, we over-estimate how obvious something was after the fact, is the best way of putting it. After the home team wins the football game, we all say, Well, it was obvious that they would have won, and we list all the reasons. And if the home team lost the football game, we would have had the opposite conversation: It's obvious they would have lost and here's all the reasons. Well, it turns out it's only obvious in hindsight. Once you know the story, it's easy to pick out the pieces that make a good story. But before the fact it is extremely difficult. And this is important: things that are perfectly reasonable to do at the time might seem irresponsible in hindsight. And that is a bias. Russ: And there's no way to avoid it. Guest: Connecting the dots--it's not connecting the dots. It's finding a needle in a haystack. That's the correct metaphor. |
| 51:50 | Russ: So, given that problem, which I think you pointed out the number of people on some watch list was 700,000--the amount of resources that we take-- Guest: Right. We can't actually watch them all. Russ: We could, but we would be very, very poor as a society and as individuals. What's the right way to think about how to respond to that reality? Because I think the natural impulse I think a lot of people have--which is I think wrong--is: We just have to fix it. We need to reduce the risk. We need to, like you say: Now we just have to have marathon finish lines, that's all; and to have body scanners; we'll just cordon off Boston next time at the Boston marathon and to get into the city you'll just have to go through the scanner and da, da, da, da. And if you do that, besides the quality of life dropping off and the worries about surveillance and the abuse of power, it's really, really, really expensive. So, what do you recommend should be our response as citizens and voters to this problem that you point out, correctly, is slightly if not greatly overly exaggerated, and our ability to stop it is also exaggerated? Guest: I think we have to accept the risk. We accept the risk of getting in a car. It's really hard to find something where driving there isn't the most dangerous part of the activity. Maybe sky diving. By far the taxi ride to the airport is the most dangerous part of a plane ride. The drive to the marathon is the most dangerous part of the day. So we are able to accept risks. We tend to accept risks that are normal parts of our life. Terrorism is rare and spectacular; plane crashes are rare and spectacular. So we over-exaggerate them. The proper response is to accept that life entails risk. And that's okay. That's not bad; that's not a failing; that's not something to fix. That is part of being in the world. For many years in our country we have recognized that the price of liberty is the possibility of crime. We deliberately reduce police power because we have a better society because of it, even though the occasional criminal gets through. Those sorts of tradeoffs, those sorts of acceptances, become harder as we live in a world where risk systematically gets removed. Where medical science, where product safety--where all of these things reduce risk, suddenly we look at our residual risk and we are aghast. What do you mean, we haven't fixed terrorism? We have warning signs on ladders, for heaven's sake. Right? We don't allow children to swim in pools unattended any more. We know better. What do you mean we can't fix terrorism? Go fix it. That's a perfectly reasonable reaction in a society that has just gotten rid of risk after risk after risk. Here's another one; just get rid of it. Can't I take a medication to get rid of this risk like I do with all the other ones? We need technology to save us. Russ: The other side would argue, and I'm not sympathetic to this, but it is possibly true: the other side would say, well, look, it's true we spend all this money, we've implemented these last-war[?] efforts, fighting the last war--the box cutter, the underwear, the liquids, etc. But look how well it's worked. And the only reason your strategy of acceptance is okay is because it is only a few thousand people over the last decade and a half. If it were every month, then it would be a serious problem. But the reason it's not every month is because we've stopped all these plots along the way. What's your answer to that? Guest: There's a couple of things. One, car crashes are every month and it's not a serious problem. So it's not obvious that it would be a serious problem. It's possible we as a society would be more accepting, like car crashes, if it happened every month because it would be normal. It would be weird, but that's possible. The other thing is: because terrorism is so rare, it's really hard to produce the argument of: we haven't had any terrorist attacks, therefore things are good. If it's like crime, which might happen several times a night, we can notice if we produce a security countermeasure, whether it increases or reduces the crime rate. If it's something like meteor strikes against the planet, they happen, what, once every 800 years, 1000 years--it's really hard to judge whether your security works because there aren't enough instances. I remember a couple of years after 9/11, and then-Attorney General Ashcroft was actually in my home city of Minneapolis giving a speech. And one of the things he said was: It's been 2 years since 9/11 and there haven't been any more terrorist attacks; and that's proof my policies are working. And I was listening to him; and I thought: Well, there were no terrorist attacks in the two years before 9/11, and you didn't have any policies. What does that prove? It proves that terrorist attacks are really, really rare. So, you can't judge rare events on probability of incidence. Because there isn't enough data to plot any meaningful trends. Again, this is a subtle argument to make to a layman. What Ashcroft said, everyone is probably [?]--wow, he's right. Russ: Sounds good. Guest: We expected a terrorist attack every week and there wasn't--what great things he's done. But it's not necessarily true. Russ: But you have to be honest: The Federal Bureau of Investigation (FBI) and the Bush Administration and the Obama Administration would all tell you about all the plots and conspiracies that they've stopped; and therefore the price of security is eternal vigilance. We need to spend all this money for surveillance, etc. Do you think we've stopped any of these? Are they real? Guest: You know, most of them aren't real. There were a couple that were real. Remember that the car full of explosives, the New York Times, that was stopped by a hot dog vendor who said: That car shouldn't be smoking that way; I better call the police. The bomb wouldn't have exploded; I think it was a faulty bomb; but I think it was a real attack. Most of the plots--and if you remember, the guys who were going to blow up the Brooklyn Bridge or topple the Sears Tower or make the fuel pipelines at JFK Airport explode--most of those, and there are some really good websites that look at all of these plots, were not real. The plotters had no idea what they were doing; they had no access to weaponry; they couldn't have pulled it off. It was mostly either FBI informants or FBI undercover agents goading the plotters and then arresting them. And I worry, because this stuff plays really good on television, that we are actually creating terrorists, to make it look like there is more of a risk than there actually is. John Mueller--he's the person who has done the research-- Russ: He's a future guest on EconTalk. Guest: Yeah. I asked him about it. He's done some great work on this. Russ: We will talk about that. |
| 59:00 | Russ: But your view, then is that we should just live with it. Guest: It's kind of in the noise. It's not like, you know, product safety. It's not like climate change or [?] quality. Or car crashes. Or serious stuff I'm worried about. Russ: Would you get rid of all airport security? Would you get rid of all wire-tapping surveillance? Infiltration? All the stuff? Guest: 'All' is a big word. I certainly would get rid of most. I mean, right now I think we are just doing it largely wrong. That the things you want to spend money on are investigation, intelligence, and emergency response. That those, that focusing on tactics and targets is overly specific, and is money that only makes sense if you guess the plot correctly. I mean, if you spend billions of dollars on the Transportation Safety Administration (TSA), and the terrorists respond at a marathon, you've wasted the money because you've guessed wrong. Russ: Well, that's a big issue. Guest: Stuff that doesn't require you to guess--think of the way the liquid bombers were apprehended. They weren't arrested in their London apartments. They chose a plot deliberately to get around airport security. And they were arrested before they got to the airport, through traditional following the leads. And that's the sort of thing that works. Emergency response works great in all sorts of disasters, I think that's real important, both natural and man-made. But a lot of the overly specific measures I think are a mistake. Airplanes are an exception. I mean, the characteristics of an airplane requires some extra security. I mean, the miracle of Boston is that the inverse square law is your friend. Right? The force of the explosion decays on the square of the distance. I mean, so few people died. You put that same bomb on an airplane and the characteristics of the plane means the plane would crash. It's not the bomb that kills people. It's the fact that the plane falls out of the sky that kills people. So you always need some extra security because of the way a plane works. Russ: What fascinates me--and this is the point you make very well in a couple of your recent essays--is: It's interesting how difficult it is to rationally process how few people were killed in Boston. Guest: Yeah, yeah, yeah. Russ: And I say this with total--every death is a horrible tragedy, to dozens and hundreds of people whose lives were touched. And by the way, it drives me nuts when people say when you ask about Boston, it will never be the same. The Boston Marathon next year will never be the same. And that's not true. Most of us will be the same. The people whose lives will never be the same-- Guest: Unfortunately the Boston Marathon might not be the same for a long period of time. Because the elites will panic. Russ: It depends. But my point is, for the people who lost their lives, those familes who were touched--their lives will never be the same. We're overdramatizing. It's absurd. It's bizarre. But the fact is that there is this tremendous emotional response that's distinct from a bad car crash. And part of it is because you choose to get in the car; and part of it is because the car serves another purpose. The idea that you are vulnerable suddenly in a way that you weren't vulnerable before is very difficult, I think for all of us, to accept. And as a result we ask for things and are willing to spend things and do things that are really not productive. And it's just very, very hard for us to just say, well, as you say, it's a small probability, we'll just live with it. And instead we say: What can we do to stop it? Guest: Right. How can we make this better? I'm scared; make me not scared. |
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| [N.B. The words 'Progressive', 'Conservative', and 'Libertarian' are capitalized for clarity on this page. They refer to groupings of ideas and systems of thought, not to political parties with the same names.--Econlib Ed.] | |
| 0:33 | Intro. [Recording date: May 9, 2013.] Russ: We're going to be talking about his new Amazon single, an extended essay in digital form, called The Three Languages of Politics. I love your book. It's only about 50 pages, by the way, and it's only $1.99--just want to set people's minds at ease. It's a bargain at twice the price, I would say. The main theme is that when we talk politics we often talk past one another because we have very different frameworks or lenses for how we look at the world. And you identify three different axes, or lenses, or heuristics, as you call them, for seeing the world. What are those three? Guest: Okay, so there are three things that set aside oppositions, or the good and the bad. So what I claim is that Progressives organize the good and the bad in terms of oppression and the oppressed, and they think in terms of groups. So, certain groups of people are oppressed, and certain groups of people are oppressors. And so the good is to align yourself against oppression, and the historical figures that have improved the world have fought against oppression and overcome oppression. The second axis is one I think Conservatives use, which is civilization and barbarism. The good is civilized values that have accumulated over time and have stood the test of time; and the bad is barbarians who try to strike out against those values and destroy civilization. And the third axis is one I associate with Libertarians, which is freedom versus coercion, so that good is individuals making their own choices, contracting freely with each other; and the bad is coercion at gunpoint, particularly on the part of governments. Russ: So, let's apply it to one example you do in the book, which is immigration. Talk about how the three different languages would work with that very sensitive political issue. Guest: Okay, so in the United States today, a Progressive might think of the people who have crossed the border from Latin America as an oppressed group, and native white Americans who are hostile to the immigrants as oppressors. And so they would be favoring allowing these immigrants to come in. With one sort of caveat, in that they also think that, would classify low-skilled working Americans as among the oppressed group and they wouldn't want to create conflicts where bringing in more immigrants hurts low-skilled Americans. For Conservatives looking along the civilization/barbarism axis, I think that having a border, and a well-defined border, and a well-defined population is part of civilized values. They would worry that if you allow immigration that you might undermine that, and they would feel very strongly that people who have crossed the border illegally have, by definition, carried out an illegal act and therefore certainly ought not to be rewarded for it and perhaps ought to be punished for it. Finally, Libertarians don't like the idea of government coercion at all, and don't see why political borders should have any significance, and so they would tend to favor open borders. So that they would see this as a freedom versus coercion issue. I should probably say that I don't think of these axes as some kind of fundamental explanation of why people think what they do. More, it predicts how they will be most comfortable expressing their points of view. So, a Progressive will be most comfortable expressing their point of view on immigration, whatever it is, in terms of how it deals with oppressed groups. Conservatives will be most comfortable talking about it in terms of how it affects civilized values versus a tax on civilized values. And Libertarians will be most comfortable talking about it in terms of freedom versus coercion. It's how they feel most comfortable talking about it, not necessarily an explanation of why they believe what they believe. |
| 5:56 | Russ: And as you argue in the book, and it's certainly part of my life experience, which is that people like to hang out with certain types of people that are like themselves, typically; a certain tribalism that is true of religion; it's true of politics, too--although people don't like to think of it that way, but I think it is a good way to think about it. So we get into the habit of talking to our inside group. And then when we take that language and confront someone who is on the other side, it's extremely ineffective. And they don't get it. Guest: Exactly. So, Libertarians feel like they've played the trump card when they've said, when they've talked about freedom versus coercion; and other people just don't think of it as a trump. And similarly the Conservative, when they say, when they've described an issue in terms of civilization versus barbarism, they think that trumps; and other people disagree. So, you get exactly that kind of miscommunication. In some ways, it's worse than that. In some ways it's almost intentional miscommunication. I've used the analogy of a football quarterback in American football calling an audible, where the intent is for his team to understand it and for the other team not to understand it. I think some of the political discourse almost goes to that level, where you are sending, by using the axis of your tribe, you are sort of signaling that you want to raise your status within the tribe and that you don't really care what other tribes think. Russ: And as a result, because we have trouble seeing the arguments of the other sides, we dismiss them as obviously misguided, foolish, wrong, evil, immoral. It explains one of the things that I always find very troubling about policy discourse, which is: Not only am I wrong, and not only are you wrong, but I'm a better person than you are. Which is a bizarre outcome for political discourse. But it is the, I'd say it's sort of the default right now. Guest: Yeah. And I think part of the use that people make of the axes is that they ultimately come to think of their opponents in those terms. Like, one of the things that I read that started me thinking along these lines was a book, I think it's called something like In Defense of Libertarianism, or something like that, by John Brennan. [Jason Brennan? Libertarianism: What Everyone Needs to Know?--Econlib Ed.] I forget the--there are many books with 'Libertarianism' in the title. At one point he says: Well, there are two alternative points of view to Libertarianism--one of them wants a nanny state, and the other one wants a police state. And what he's in effect doing is saying that people who disagree--he doesn't look at them along their own axis. He looks at them solely along the freedom vs. coercion axis, and say they want coercion. Whereas, they wouldn't describe themselves that way. Similarly you'll hear people say about Libertarians, you know, they just want to see people starve. They want to let people suffer. And again, that's not how they would describe themselves; that's not how they arrive at their position. But if you are trying to simplify the world into oppressors and oppressed, then it simplifies your world to describe your opponents, whether they are Conservatives or Libertarians, as oppressors. And then you've kind of simplified the problem and made them demons. So, people demonize their opponents along these axes. And you'll see Conservatives say that Obama's actually just a barbarian--he's really on the side of the terrorists. Russ: He's trying to destroy the country. His goal is to destroy the country. Guest: Yeah. And they'll say that Libertarians are doing the same thing, by advocating, eliminating drug laws and not doing enough to support the family through government, and so on. But it really goes to the point of deciding that people who disagree with you don't disagree with you legitimately, but because they are on the opposite end of your preferred axis. Russ: Which is a place they would not put themselves. But your claim is we have this natural habit of dividing the world into one axis, really, with one end that's good and one that's bad; and to shove people into the--they disagree with us, they must be at the other end. But they are orthogonal to us, it turns out. Guest: Yeah. And I think it's part of a process of reaching what some psychologists used to call 'closure'. You feel that everything is settled when you can dismiss anyone who disagrees with you by just saying, oh, they are just on the opposite end of my axis; they are actually just bitter opponents to everything I stand for. Russ: They are evil. |
| 11:21 | Russ: So, I have often--you don't sell the ideas in the book this way, but I have often suggested that something along these lines--I don't think of it the same way, obviously--that if you want to get people to agree with your world view, I think that most people think the way to do that is you just prove they are wrong. And then they'll just throw up their hands and say, Oh, I'm sorry; my whole life's been a lie. And that doesn't work. It doesn't work in proselytizing for religion; it doesn't work in proselytizing for ideology. And so what this book suggests--this is the part I think you talk about explicitly--but it implies that if you want to encourage someone to think the way you do, you ought to put yourself in their shoes and use their axes. Guest: Yeah. Or at least understand the legitimate side of their argument, rather than try to characterize it in the most illegitimate way. I really want to fall short of claiming that you can, sort of--it's called The Three Languages of Politics, and I want to fall short of claiming that by learning to translate into someone else's language you can suddenly persuade them that you are right. I wouldn't promise that at all. I do think you have a better chance if you understand them. But I think you also take the risk, if you understand their language, that they may persuade you. Russ: Ooooo. Guest: And my guess is if you are not willing to take that risk then your chances of persuading someone else are probably less. Russ: But you'll have a better marriage, if your marriage is someone whose axes aren't the same as yours. I mean, my claim--again, mine's a simpler claim that I've made in the past, which is that you should be empathetic. And you should consider whether your opponent can possibly be right. And by doing so, you could actually learn something and understand better how to think the way they do. And my other benefit is, it's the right thing to do. You are a nice person. Why would you enjoy treating your ideological or religious enemies as evil? Or even misguided--is also disturbing way to treat another human being. They're smart, thoughtful, nice--most of them, not all of them. Some of them are monsters, you're right; but a lot of them are just like you. They have a viewpoint and they've crammed a lot of facts and studies into that viewpoint to convince themselves that they are right--just like you do. Guest: Yeah. I guess that's a difficult way for people to think. So maybe one of the benefits of reading the book is it will make it easier for people to think that way. |
| 14:11 | Russ: So, how did you choose the axes? The idea that there are different worldviews is not a unique idea. What's I think particularly thoughtful about the book, and thought-provoking, is the axes make sense to me. Now, I, of course--you can't more or less--I'm in the L-camp, the Libertarian camp, the freedom/coercion camp mostly. So maybe it's just natural that they would make sense to me. But I do seem to see them around me, those different, the axes of people who don't agree with me. So, how did you come to that idea? Guest: Well, maybe at some point in my life I've sympathized with all three points of view. So I kind of was thinking: What did I think back when I was a New Left, Anti-Vietnam War liberal, progressive; and what did I think when I was thinking that George Bush was a good president for how he was reacting to 9/11--so maybe I was focused on civilization/barbarism? And by the way, when I think about terrorism, it's pretty hard for me to not think about civilization vs. barbarism on that one. So, as a Libertarian, I'm certainly familiar with how Libertarians speak. And I just sort of--and I was asking myself--I had this insight about a year ago, maybe a little more, that it seems like so much punditry, if you step back and look at it, is an attempt not to open the minds of people on your own side, or even to open the minds of people on the other side, but it looks like the real purpose is to close the minds of people on your own side. So then I started asking myself: Well, how would you go about closing the mind of someone on your own side? Well, if I were a Progressive, how would I try to close the minds of my fellow Progressives on issues? Well, if I could frame this as oppressors and oppressed in a convincing way, then that would make them shut out all disagreement. And similarly with civilization/barbarism, for Conservatives. Once I frame that issue that way, a. they'll think I've been really smart, and b. they'll feel even more closed on the issue, more settled that they are right, if I can frame it along that axis. I was looking--it's also like my own experience. To the extent that I phrase something in freedom vs. coercion terms, I would get this tremendous applause from people on the Libertarian side; and the opposite from people coming from different points of view. So, it was those types of things that led me to think that those were the axes. Russ: So, your examples, in that little mini-history reminds me of something I don't think you talked about, which is that occasionally there is an issue of oppressed vs. oppressors, for everybody. Or, civilization vs. barbarism, for everybody. The terrorism issue is a great example. A lot of people across the political spectrum worry about terrorism. Might react to it differently; they might react differently to what policies are justified or should be put in place to stop it. Guest: Well, let's look at that. I don't want to interrupt too much. But let's take the Boston Marathon bombing that took place recently. Russ: Okay. Guest: So, let's look at the reactions to it. The Weekly Standard, I think this was a cover piece or lead editorial, was entitled, exactly, Civilization and Barbarism. They felt like this was right in their wheelhouse, and this is exactly how you'd have predicted they would react. I think others had great difficulty with it. It had this infamous column in Slate Magazine, before the bombers were identified, saying, boy, I hope it's white male. It's like, I hope it's somebody that's certified from the oppressor class. You had President Obama referring to--what was the term--self-radicalizing terrorism. As if you or I could walk down the street and all of a sudden, poof, we self-radicalize. Russ: It's like a virus. It just gets in your bloodstream and then you are stuck, you are off the track. Guest: Yeah. Which seems to me like an attempt to avoid talking about it in civilization/barbarism terms. And finally, many Libertarians talked about, were very critical of the lockdown in Boston; said, this is a police state, there are tanks in the street, all this stuff. And I think Libertarians may have some very valid points going forward about how society reacts. You know, there may be a lot of unnecessary and civil-rights-reducing kinds of surveillance and limitations of people put on as a result of this. I'm not saying Libertarians don't have anything to worry about. But I think that the focus on the lockdown and the actions of the police might very well be inappropriate, and it certainly is not going to win Libertarians any friends, because I think most people's reaction to the police after the bombing--I mean, before the bombing you can argue that some dots should have been connected that weren't--but afterward that their conduct was pretty brave and pretty effective. I think that's what most people would say. Russ: I agree with you, and that's a great example. The only point I was trying to make is sometimes there are actual issues where the axes apply absolutely directly; you don't have to stretch to make them fit. And in those cases sometimes people drift into different categories. So there are Libertarians and Progressives who were initially in favor of the response to 9/11, who supported the war in Iraq because they thought it was a blow against barbarism. I think. Or maybe just public safety. But I think a lot of people were accepting the Conservative axis temporarily at least, or not temporarily but for this issue. And temporarily, as it turned out. Guest: Yeah. Russ: And similarly, when there is a case of oppressor and oppressed, there are Conservatives and Libertarians who will spring to emotional reactions to those issues. I think what makes the paradigm so powerful is that for most of us, we wedge every issue into these categories, our respective categories. I think that's what makes it powerful. Guest: Yeah. I think that putting them in those categories when it's appropriate--when it's something like using the oppressor/oppressed axis to describe the fight against Jim Crow laws, I think is perfectly fine, and you could understand why anyone would do it. But it's when--it's really noticeable, as you say, when people force issues into that mode when there's--most typically when there are just a lot of nuances to the issue, and that if you are really going to think about it carefully you can't reduce it to those simplistic terms. |
| 22:35 | Russ: And besides the fact that it's nice to think of your intellectual or ideological opponents as decent human beings, in many ways for the book is a calming influence. So, when you see a column or a pundit saying something that drives you nuts--because of course it goes against your axis--instead of saying, what a jerk, what a fool, he's evil--it's interesting to say, well, you know he's got his own little goofy way of looking at the world and he sees everything as related to his issue. And--pity is not the right word. You understand it. It's not as offensive as it is if you think they are just crazy. Or, against your view, which is even more maddening. Guest: Yeah. Although, what I end up being offended by, then, are people who--not because they look at an issue in a particular way, but jump to presuming that the other side is evil. David Brooks had a column about a week ago that I was very sympathetic to, where he talked about a detached point of view versus an engaged point of view. That a pundit who is engaged, it's just like they are in the battle zone and throwing punches as fast as they can. And detached, is actually observing and trying to see the point of view of both sides. The goal--I think Brooks is arguing--at this point we've certainly got plenty of engaged pundits. We might be able to use a few more detached ones. I would be making a similar point. And again, a goal of the book is to enable you to have some sort of detachment. Russ: It reminds me a little bit of the earlier insight of yours that for some reason I associate that you had from your father, the insider/outsider aspect of politics, that insiders invest a lot of time and energy, know what they are doing, and they are able to make the system work in their direction; and the rest of us are just watching them on the outside, not really paying attention so much. When you think of the world that way, again, for me, it's kind of like: What would you expect? That's the way it's going to turn out. And it's not plausible that our side wins every time or the good policies prevail. Guest: I think, if I could try to imagine what my father would say, it would be that all of the storm and fury along the three axes is just for show, to give people a sense of ownership in the process; and meanwhile the sober, rational people are in the back rooms dividing up the goodies. So, for instance, if you look at labor unions, so one side looks at it from an oppressed/oppressor point of view; another view says these unions are like thugs, so it's a civilization/barbarism issue; and meanwhile in the back room the unions are raising wages and the firms are raising prices and everybody else is kind of getting less to take as a result. That would be kind of the classic insider/outsider story. All the ideological stuff is just to keep the outsiders entertained and distracted. Russ: It's the window dressing. It's circus. |
| 26:45 | Russ: You make an analogy between your three kinds of language and the Myers-Briggs test. Now, explain that analogy. Explain what Myers-Briggs is for people who don't know what it is. Guest: Myers-Briggs is a personality test that's always been more popular in the business world than in sort of academic psychology. So, I've got to put that caveat out there. It tests your propensity on things like introversion versus extroversion, or intuition versus facts, and things like that. The use that is made in the business world is, in a business, complex organization, you need all sorts of people. You need detailed people, you need big picture people; you need people who like to mull things over; you need people who want to see decisions made and made quickly. You need these different types of people, and they often don't get along. Somebody who is very intuitive doesn't have the patience for somebody who is very detailed; somebody who is very detailed doesn't respect the person who is intuitive because they just can't follow their crazy leaps and they see all the mistakes they make with details. So, these people, their natural tendency is to not get along. And the idea of the Myers-Briggs training is to first of all, you take a test and you see where your tendencies are. And then you learn insights into other people's tendencies and you become more tolerant of them. That's kind of the long story. The analogy with the book is that I'm hoping that if you can see which tendencies you might have and understand the tendencies of other people that it would be easier to get along with people who have different tendencies. Russ: Well, I think it's true. And I think the personality difference--I know it's not "scientific"; I'm putting "scientific" in giant quotes because very little is scientific in my mind. So I don't make that big a distinction between Myers-Briggs and academic psychology. But the idea would be that somebody who is obsessed with getting their to-dos checked off, versus somebody who doesn't keep a to-do list and sort of is always flying, doing things at the last minute and doing things on the fly--and each of those people looks at the other one like they are crazy. You don't keep a to-do list? How do you get your tasks done? Oh, well, some things fall through the cracks. What? And the obsessive person--which is a slightly derogatory term--the detail-oriented person, the person who is focused on the tasks, can't understand that other person; the other person thinks, what's wrong with that person? All they care about is their little to-do list. They don't have time to think and ponder and do the big-picture stuff. And when you think about how that challenge of interacting, especially if you are doing a project together, which is why business care about this stuff and organizations care about it. And the political thing is not that different. It's very similar. And I've noticed in a lot of organizations, political attitudes spill into personality traits and, you know, organizational policy. Guest: Wow. It's been a while since I've been in a big organization, but I do see alarming signs of politics taking over things--maybe it's just me, but more Facebook posts I see--and these are from people I don't think of as being in my sort of academic/political circles, they are all political posts on Facebook. Russ: Meaning that they are just more politicized? Guest: Yeah. It's Facebook. Stereotypically it should be people putting up pictures of themselves drunk at parties. Of course, the people I'm friends with are too old for that. It's still--in some ways this is worse. Russ: I don't think--I think that stereotype of Facebook and Twitter is not true. I think it's just a different blogging platform, and people who normally wouldn't even bother starting a blog are using their Facebook and Twitter accounts for their blogging. |
| 31:51 | Russ: Moving on. One thing I thought of as I was reading the book was Thomas Sowell's book, A Conflict of Visions, which is a fabulous book. And you refer to it, when you are talking about other similar viewpoints. Talk about Sowell's vision in that book and how it relates to yours. Guest: That's a good question. So, the terms that stand out are 'unconstrained vision' and 'constrained vision.' So, in his view, a Conservative has a constrained vision, very aware of the limits of human nature, the limits of resources, and things like that. Russ: The limits of reason, the limits of experts, the limits of lots of things. Guest: Yeah. You might very well do a better job than I could of summarizing that. And the unconstrained vision just says in some sense--this quote that I'll probably get wrong from Robert Kennedy: some people see things as they are and ask why; I dream dreams that never were and ask why not. That would be sort of an unconstrained vision, dream dreams that never were and ask why not. Russ: Utopian. Guest: Yeah. Having said that, a difference between Sowell's view and my view is Sowell, I think, is really trying to get at why people believe what they do. Why do Progressives believe what they do? And he would say it's because they have this unconstrained vision. And Conservatives believe what they do because they have this constrained vision. I very much am not claiming to explain why people do what they do. That is, it isn't because you focus on oppression and the oppressed that you have your Progressive point of view. I'm saying that it's part of the process of how you believe what you believe, or how you process your beliefs. How you express them, and how you respond to the way other people express beliefs. I think that Conservatism, Libertarianism, Progressivism are all very complex belief systems and there's just a lot more going on than just these three axes. But I think that the three axes are kind of what people use, like magnetic poles, to kind of line up their side versus their opponents. It's like a set of cheers or taunts that they use to whip up tribal solidarity. Whereas I think Sowell is attempting to explain why people believe what they do. I'm talking more about the process by which people push for tribal solidarity in what they believe. Russ: So, in the back of the book you have an appendix where you go through some pundits and try to see how well the theory, the model, the idea explains what they write about and how they write about it. It strikes me that maybe another interesting way of examining the usefulness of the model would be to look at political conventions, particularly the non-prime-time people, which I occasionally watch as a source of humor and I don't know--academic interest in how easy or hard it is to motivate a large group of people. I find it interesting to see how well and badly people do at that. But my thought would be that when you look at the two major parties, a lot of that would be their warm-up acts for the keynotes, operate along your axes. I think that would be an interesting thing to look at. Guest: Yeah. I hadn't thought of that but that would be, that sounds absolutely right. That would be a situation where your main goal is kind of whipping up the tribe, sort of like the locker room speech for a football game. And that's when you would expect people to really use these axes the most. So that would be a good test of this. |
| 36:46 | Russ: So, why did you write this book? Was your goal--I mean, obviously there are many goals. But was your goal simply to--you suggested a minute ago it was to improve political discourse and tolerance. Is that your goal? Guest: Good question. I think that some of it, I think part of the motive is to get people to back off from the point of demonizing those who disagree as if they were on the other side of the preferred axis. So, if we could get Libertarians to stop thinking of Conservatives and Progressives as wanting coercion, loving power, that kind of thing. Russ: But Arnold, they do. That's what they're about. It's sometimes hard to keep out of that. Sorry. Just kidding. Guest: And similarly to get Progressives to not think of Libertarianism as a dog whistle for racism or whatever they accuse it of being. Russ: No, Libertarianism is for rich people. It's to help rich people get really rich and stay rich. That's what Libertarians are in the Progressive world view. Guest: Yeah. So, you get the point. If we could just reach the point where we don't automatically demonize people then I think the book would have accomplished something. Russ: Of course one thing that runs through the book is confirmation bias, which we all suffer from. And I was reminded of the Richard Feynman quote, which is: The most important principle is not to fool yourself, and you are the easiest person to fool. It strikes me that we fool ourselves a lot along these lines, and cherish being fooled, because it's a good cozy feeling to be part of the tribe. Guest: Yeah. I think that the book discusses a number of findings in the psychology of political beliefs, including confirmation bias, which is a very important one, that I think are reasons to be aware of the three axis model, because I think people use these axes in ways--I think it promotes biased thinking. There's a lot of--everyone wants to talk about predictable irrationality, thinking fast and slow, all these findings that suggest that we cannot reason very well. And I have this faith that we have something that I call constructive reasoning, where we can actually look at things objectively and not from entirely biased point of view. And I call that a 'faith' because the psychology seems to always go the other way. And I think people can reason more constructively if they can not automatically react along these axes. Russ: I guess I could accuse you of having a somewhat unconstrained vision. Right? Guest: Yeah. Right. Russ: There's not much more quixotic than trying to improve political discourse. Guest: Um, yeah, that's true. I'll grant you that. |
| 40:45 | Russ: Let's turn to our home team, not the Libertarian part of it, but the economist part. We're both trained as economists, and I am particularly disturbed by the nature of economic political debate, or political economy debate--whatever you want to call it. The policy debate that economists are engaged in. How do you see your axes playing out in economic policy among economists? Guest: Wow. That's a good question. I'll probably have an excellent answer a few hours from now after I've mulled it. Russ: You can blog on it; we'll put a link up to it when we run this in a couple of weeks. So, you have a couple of weeks to mull on it. But give us your quick thought. Guest: The off-the-cuff story. I think that one thing that the three axes might enable one to do is to recognize an economic argument from an axis argument. So, if a Progressive economist starts writing in oppressor/oppressed terms, you can say: okay, you are entitled to say that, but at that point you are speaking from outside the economic paradigm, because that's not really the economic paradigm unless you are actually a literal Marxist, which I don't think any real pundits genuinely subscribe to that. And similarly if a Conservative economist starts to write along civilization/barbarism terms, that's a sign that they've sort of vacated their economic thinking for a moment and have switched to something else. Maybe that would be one application of the model. Russ: I noticed you didn't say anything about the Libertarian economist. Guest: Well, actually the Libertarians are more often slipping into their axis than anybody else. Right? Russ: We're talking about government intervention, so once you do that-- Guest: Yeah. So, when a Libertarian makes a sort of Hayekian argument about lack of information or a Friedman argument about people making better choices for themselves than the choices they make for others, those I think are economic arguments. But you can see a Libertarian economist sort of put on his full Libertarian clothes and start talking about, this is taxes collected at gunpoint; at that point they've taken off their economic clothes. Russ: I thought you were going to say that that example of Friedman was an example of the axis. Because it's hard to distinguish between people spending their own money on themselves and people spending other people's money on other people from the freedom/coercion argument. But maybe. Guest: Well, if you think of it as choices, where do the choices get made? Without saying it's freedom versus coercion--you can say that: I voluntarily have government tell me which side of the road to drive on. You know, no problem there. Then, just as easily could say: I voluntarily have government decide how to educate my children. You can certainly say that the essence--I don't think most people other than Libertarians wouldn't say that the essence of public schools is coercion. That's not the essence of them. And most people, including Milton Friedman even, would say what fundamentally is wrong about the way our public school system works isn't so much the coercion--it's the monopoly. It's that if people had more choices and could, to use the familiar exit versus voice terminology, if they had more opportunity to exit, that would lead to better schools just as it leads to better grocery stores when people have the option to exit there. So I see that as something that's grounded in economics. Whereas saying, if you say public schools are just tools of the state to get the state to have obedient citizens, you may or may not be right about that, but you are not making an economic argument. Russ: I think it's interesting, for people who are listening at home, or wherever you are, how often when Arnold said that when coercion isn't the essence of the public school system, did you think to yourself: oh, yes it is? In which case, maybe you've learned something about yourself. It could be true, by the way. I don't want to suggest that it's false. But what I find fascinating about these issues is how hard it is, how difficult it is to step outside your own paradigm. And how easy it is to see the world through your particular kind of glasses, the kind of glasses that we've become accustomed to wearing. I find that fascinating. Guest: Yep. It will be interesting to see people's reactions to some of that stuff. |
| 46:43 | Russ: Let me give you another application of where to think about it with economists. When I asked you this question, you said, well, you'd have to look and see do the economists, do they step into the axis, meaning they take off their economist hat more or less. But of course, the temptation is to do that. If you only talk the economics, you are not going to get any fans. If you want to get the crowd cheering for you, if you want to get your tribe riled up and you want to be carried around the arena on their shoulders, if you just say things like: Well, I think the elasticity of demand for labor is .7, not .75, or more accurately, not 1.3, but what you do is take your economics argument and you shove it into one of these paradigms, and that's what makes you popular. Guest: Well, sad to say, I think there's a lot to that. I think one of the things about if you discipline yourself never to leave the economist camp and to never rely on these axes, then I think your ability to have high status within a camp will be diminished, or just won't be there. That's why I think someone like Gary Becker, someone who writes well, writes on policy issues, has a blog--I don't know how many followers it has but probably he has 1/100th of the followers of Paul Krugman; and yet they are both Nobel Prize winners. I'd say if anything, Becker does more economics on his blog. But I don't think he is as willing to play to any of the axes as Krugman. Russ: Yeah, without picking on particular people, I do think that there are folks who, as you say, have a lot to say and you can learn from, if that's your goal, who aren't as prominent. Of course, that isn't always our goal. Sometimes our goal is just to get a good cathartic read and feel good about ourselves or bad about the other side, and that's a different product. Guest: I think that, to me, I really care about style. So I really appreciate most the economists who try to stay away from arguing along the axes. And I will pick on Krugman because I think he sets a horrible example in that regard. And his success, I don't think it has been a healthy thing for economists. It gives you an impression of how to succeed that I think takes you away from talking like an economist. Russ: So, when I think about that, about the incentives that we face--and of course, you and I are in this market in a very modest way. We blog, we write policy books, we appear on podcasts. And when I think about what to do about it, I think the incentives all work toward, what I said a minute ago, toward playing to the crowd and the axis and finding a home along an axis that is pleasant and comfortable. It's hard to imagine that this is going to change. And I see your book mainly as a self-help book, as a way to improve the way you think about yourself and to some extent maybe to help some others. There's always a tendency to say: Well, I don't have this problem; here, you need to read this book. I'm fine. Guest: Right. I agree with the self-help notion. One of my lines in the book is you really have no business pronouncing someone else unreasonable. The only person you are qualified to say is unreasonable is you. |
| 51:34 | Russ: When we think about what's going on in economics in the last few weeks, we had this little problem where a couple of researchers left a line out of a spreadsheet. That was their main error. I'm talking about Reinhart and Rogoff, of course. They have written a paper about the relationship between public debt and GDP growth, and when some scholars tried to replicate their work, they couldn't do it; and one of the reasons they couldn't is they had forgotten a line. And when they included the line in the spreadsheet, it changed the results--not a trivial amount, but it didn't overturn the results. But it did reduce their impact. And the firestorm that followed was really extraordinary. What was your reaction to that? Guest: Well, I think that--and this may sound whiney, but I think that Conservative scholars are given much less margin of error in the world. If you take Elizabeth Warren's research, which I think would embarrass some undergraduates, she gets a free pass or praise in the media. Maybe I'm being narrow, but I think that it's amazing to me how many of these firestorms seem to involve people who stray from left-wing orthodoxy. And that people who subscribe to left-wing orthodoxy seem to have a teflon coating in the media. It's a paranoid point of view, and maybe if I watched Fox News's take on climate scientists or something, I would be paranoid from that point of view. Actually, I wouldn't be because I'm not a climate-science believer--don't tell anybody. Russ: Don't worry--nobody listens to EconTalk, Arnold. Your secret is safe with me. Guest: Good. That was the main impact. Part of it is that 90% thing, when I first saw it in Reinhart and Rogoff was--oh, no. Russ: Explain that. Guest: So, the way it's been read in the media--and maybe they intended this, and if they did, they deserve some opprobrium for that regardless of the spreadsheet error--but in interpreting of the media it made it sound like, well, you can run a debt to GDP ratio that's pretty high, but once you get to 90% you are going to have really bad impacts on economic growth. It's like there's this speed limit of 90% debt-to-GDP ratio. And that looked to me to be in a class of statistical findings that are just highly suspect. It's just not a good way to think about that issue. So, I reacted to that negatively when I first saw it. So, maybe I just assumed that other people didn't make a big deal out of it. But other people clearly did. I just opened up a book the other day where on p. 5--these are Conservative economists and they pound on that 90% number: Reinhart and Rogoff have shown that if the debt-to-GDP ratio hits 90% then-- Russ: research shows-- Guest: horrible things happen. Again, for me, that's the class of findings that I wouldn't have trusted from the get-go. It's not even a good way to think about it. So, maybe this controversy in some sense is legitimate. Maybe there were Conservatives who really did base all of their policy arguments on this. But I have a hard time seeing that because I don't think I've ever cited that number. Russ: It's bizarre. But on the flip side, I just interviewed Austin Frakt on the Oregon Medicaid Study and he said it seems to me that we are having a similar blogosphere explosion overreacting to one study; therefore, the Reinhart-Rogoff thing is wrong so any kind of debt is allowed; it doesn't matter what it is now, because they are wrong. Guest: Yeah. There is no limit to how much debt you can have-- Russ: because they are wrong. Because they made an error. Although it's interesting--no one has accused them of deliberately making an error. They have accused them of negligence but not malfeasance. Not fraud. But the Medicaid thing is similar. There are some results for the pro-Medicaid side; but most of the results are for the anti-Medicaid side. So now it's: Well, Medicaid doesn't have any effect; okay, we can eliminate it. A little bit of an overreaction. Guest: Yeah. It would be nice if you could get some kind of--I think you could get some kind of a sober consensus that--to me, the significance of the Medicaid Study is that a lot of people will argue that the reason you want to have comprehensive health insurance is that the small procedures that you subsidize will, down the road, save you money because people will have taken better care of themselves. And that is the argument that I believe is threatened by the Medicaid Study. And I think for people to have a sober discussion about whether comprehensive insurance is the only legitimate form of insurance or whether catastrophic health insurance would be better. I think Kathleen Sebelius, the head of Health and Human Services (HHS) was quoted a few weeks ago to the effect of saying that people who--catastrophic health insurance is just an evil; people need comprehensive. And I would hope that any economist would at least look at this and say, well, it did not support one of the main arguments for comprehensive health insurance, which is that subsidizing people to spend on the little things will cause them down the road to have less long-term expensive illnesses. Russ: But it doesn't refute that. I mean, it was only a two-year study. It's suggestive; it didn't confirm that view. Guest: Right. I don't want to overstate what it accomplished. But they did focus a lot on people who had these chronic illnesses, like diabetes, to sort of see in particular whether it made a difference there. And then you also have to look at it in the context of lots and lots and lots of studies showing different groups of people with different levels of health care spending and not different outcomes. If this were the only study that found that, I think you would just throw it out as an outlier. But in fact, it's what every study shows. There's that great paper by Robin Hanson that just walks through all of them. And even since Robin wrote his paper--Amy Finkelstein did a study of the introduction of Medicare, looking at different states, because some states already in 1965 already had coverage for the elderly; others didn't. She finds the same thing--no difference in outcomes. I think it's in that context that you have to see the study as one more straw. |
| 1:00:50 | Russ: Well, to come full circle, I was once speaking to a group of journalists, and we were talking about health care in a very general way--this was years ago, well before Obamacare. And I think I was probably saying something like: Don't we care more about health care, health insurance--something like that. And somebody challenged me and said: Didn't the RAND study show--what the RAND study showed was that different levels of subsidies people who got a bigger subsidy to health insurance for health care purchase used more health care but their health care outcomes weren't much better. No difference. So I just mentioned that: That's interesting; I'm not a health care economist, it's just something I knew about; it seemed interesting. And he got furious. Really. He started yelling at me: The RAND study. And to him--he probably said this literally: Those are code words; that means you don't care about poor people getting health insurance. That's really what the point of your book is: he's on that axis, and I was on some other axis. I don't know what axis I was on--Mars. But I'd offended him. He didn't just go: Oh, that's interesting; maybe I should rethink my position. Strangely enough he didn't think that way. He got mad. Guest: Yeah. One of the studies I cite in my book--it's sort of a controversial study and maybe it needs to be replicated in a lot of different ways before it deserves to be cited; it's probably been cited a lot more than it's been replicated--says that if you take two people who come into a position with a strong viewpoint and you show them the same facts, each of them strengthens their own viewpoint. Russ: That's too sweet, isn't it? It makes you wonder whether it's true. But it's delicious. Guest: So that's certainly frightening. And that's consistent with some classic political science research which says that elites, political elites, are more polarized than political masses. So, the more informed you are, the more polarized you are. And that might be an intuitive position, but you can see that being a counterintuitive position. That is, wow, you'd think that as people learned more, they would converge. But there's a correlation between level of knowledge and degree of polarization. And that's been true--that was first discovered in the early 1960s. I think the problem is now--they're more informed. Russ: Yeah, it's even worse. More polarized. |
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| 0:33 | Intro. [Recording date: May 21, 2013.] Russ: Jim has thought a lot about what we can learn from experimental data.... He's the author of Uncontrolled, which Jim and I discussed in a podcast in June of 2012, last summer. That's a book about the challenges of teasing out causation in a complex world. And today we're going to go a little deeper than we have in the past, or at least continue to go deeply, into the Oregon Medicaid Study, a subject of a recent podcast with Austin Frakt. You might wonder: Why are we doing a second podcast, a second episode, on this one study? Two reasons. First, I think that over the next year and a half you are going to be hearing a lot about the Oregon Study. I think it's going to play an important role in the continuing conversation about implementing Obamacare [Affordable Care Act, ACA]. But the real reason I wanted to talk to Jim was because of a fairly lengthy article he wrote about the study, that I found to be utterly fascinating in the aftermath of my discussion with Austin Frakt. They both looked at the same study; they both looked at the same results. But they drew very, very different conclusions. More than that, Jim noticed some results in the study that nobody else seems to have noticed, and I thought it would be fun for those of you in the listening audience to listen to his observations. And along the way we'll get into some other issues related to data and statistics and what kind of conclusions we can draw. We won't just be talking about the study. But it's a wonderful vehicle for examining some of these questions. So Jim, welcome back to EconTalk.... First, a quick review of the experiment. Oregon decided--and you can correct me if I'm getting any of these facts wrong, Jim--to expand their Medicaid program, which is a health insurance program for poor people. But they didn't have room for everyone who was conceivably eligible for this expansion. So they had a lottery. And that created two groups--people who won the lottery and ended up on Medicaid--they were the experimental group--and people who were somewhat similar but who just happened to lose the lottery. So, it was a chance to do a controlled experiment, which you don't get to do very often in economics. And so Oregon used a bunch of first-class health economists to follow up and study what happened to these folks, both before and after the enrollment into Medicaid for the experimental group, and for the control group to just examine what had happened to them in the meanwhile. And this recent study that came out in the New England Journal of Medicine was a two-year--I think it was a little after 2 years, so 25 months--so two years after the Oregon Study. It started--they wanted to see what the effect on the experimental group was. And I'm going to read a very short summary. This is from the conclusion to the New England Journal of Medicine paper:This randomized controlled study showed that Medicaid coverage generated no significant improvements in measured physical outcomes in the first two years, but it did increase use of health care services, raised rates of diabetes detection and management, lower rates of depression, and reduced financial strain.So, there were no significant improvements--and we'll be talking about what that means, 'significant'--no significant improvements in measured in physical health outcomes--that would include cholesterol, blood pressure, and I think blood sugar levels. And most of the debate over the findings has been on the physical health measures, that there was no significant improvement. There were some improvements. They just weren't statistically significant. We'll come back to that. But as when we had the conversation with Austin Frakt, we looked at those range of findings that were in that summary. But what fascinated me about your analysis was: That was not what you started off with. You started off by saying, noticing something that no one else noticed: That not everyone who won the lottery chose to apply for the opportunity to get what was essentially very, very inexpensive, and sometimes free, health care. Explain what happened there, and what you learned from it. Guest: Well, starting with what happened, your summary, to my knowledge, is accurate. And there were just under 90,000--89,000 or so--people who signed up to participate in the lottery. Of those 89,000 or roughly 90,000 people who signed up for the lottery, 35,000, roughly, were selected. That is, they won the lottery. Selection actually happened at the household level, so it was really about 29,000 or 30,000 households were selected. But since the measurements for physical [?] were held at level of people [?], in general, we talk about people in this study even though technically selection happened by household. So, about 90,000 people applied; 35,000 won the lottery. And what winning the lottery meant was that if you submitted an application within 45 days and were found to be eligible, you were granted access to this Medicaid program. So, of the 35,000 people who won the lottery, about 60% filled in and submitted the application within the deadline. Therefore, obviously 40% did not. Of those 60% who submitted the application, about half were eligible; and about half were not found to be eligible, either because their income was above the poverty level or some other reason; but that was the primary reason according to the authors of the study. So, one simple observation that I had was--so, it was surprising to me. Not that you didn't have 100% of the people who won the lottery fill out the application and submit it, but that almost half of the people who won it, didn't. I think if your mental image of the uninsured, and I put this in the piece, is a family huddled outside a hospital with a sick child who just cannot get the money to pay for the doctor to give them antibiotics, that result doesn't make a lot of sense. And I also don't want to trivialize the extreme difficulty that [?] of poverty can create in accomplishing seemingly straightforward tasks. I understand that there are huge challenges in accomplishing something like that when you are moving a lot, you are often not opening all your mail because it's mostly bills, you have a lot of problems being able to get things done. But I do think that, by [?] of logic, there are only one or two possibilities for why someone, a given winner, did not submit that. Either, a rational analysis indicated that the expected gain from coverage didn't justify the time and effort of filling out the form and submitting it, or the winners did not act rationally about the long-term benefits versus immediate inconvenience. And to me, I think neither is a strong argument for the value of this program, because in the first case it just means insurance isn't really worth a lot to those people, at least, the 40% who did not submit it. In the second case I think it indicates that the same things that make it hard to submit the application to get the insurance are probably indicators that conformance with the kind of therapeutic regimens that are necessary to effect the key physical health indicators which are measured in the study, which are basically blood pressure, blood sugar, and cholesterol, are very likely to slip and not be met. And so, that to me was a very telling fact that I hadn't seen anyone mention. Subsequently I realized that Roy also pointed out the same thing. Russ: Who pointed it out? Guest: Avic Roy, a blogger and health care analyst. |
| 8:23 | Russ: Just to untangle that closing point, which I think may have been lost in some health care jargon: What you are saying is that if you are not very excited at being part of Medicaid, maybe you won't be so good at complying with whatever health rules or drugs that might purport to help you. You might not be a regular taker of your meds. That's what you are worried about. Guest: Yeah, I think that's right. Either you are not excited about it because it really isn't worth that much. I think the much more likely case, intuitively the more likely case, is in fact you do at a rational level at least see getting health insurance as being quite valuable but the fact that you didn't submit the form within 45 days is a marker for your likely behavior over the 2-year coverage period that's being studied here; that as you say, indicates for various reasons--that I can understand, given the kind of life situation you might be in--you don't take your meds every week. Or you have a dietary and exercise routine that you are not following. Or you are not doing any of the many things that are necessary to manage a chronic condition to improve the specific health indicators that are looked at here. Russ: And just to clarify this: If you were selected in the lottery and you were eligible--again, correct me if I'm wrong, but I think it entitled you to all forms of standard medical care, including pharmaceuticals other than, I think Austin Frakt said dental and I think eyeglasses. But all basic medical care services would be available to you and you'd only have to pay a monthly fee as a participant in the program of between $0 and $20, where the amount you paid depended on how close you were to the poverty line. So I assume if you were at the poverty line you'd pay $20 a month; if you were at something below the poverty line you might be paying something as low as $5 or $10 a month, or maybe $0 if you were very poor. And so this was a deal, on the surface. This was an incredible bargain that, as you say, 40% of the folks decided it wasn't worth it, or just missed the chance, as you point out--we don't know what the real reason was. And it would be a very interesting followup to talk to those 40%. Because it's not a small number. It's not like oh, there's this odd group that just for some reason passed up a chance for free health care insurance or cheap health care insurance. Nearly free health care. They just--a massive group, 40%--said, eh, I'm not going to do it. Guest: That's right. And I think that some of the possible reasons beyond literally just saying, I'm not going to bother, are: they are moving frequently. So, it's hard to contact them by mail. Another reason is they could have for one reason or another moved onto some eligibility for some other insurance. I think the authors think that second cause would be a relatively small number. But there are also, virtually certainly some of them who in fact the mail did arrive at the house where they lived and for some reason they didn't submit it. I really went to great pains to say I wasn't trying to make some kind of a judgment, a moral judgment. This isn't about a moral judgment about these people who didn't respond. It is purely about a marker for behavior which in my view is intuitively correlated with plausible failure to comply with chronic disease management regimen. |
| 11:54 | Russ: So, how does that affect--and this is where I think it gets very interesting as a general example of how to think about data and findings and studies, because this is "the gold standard." It's a randomized, controlled test. It's one group that just happened not to win; another group that did win, and we are going to compare them. But as you point out, the fact that 40% of the one piece of the population did not submit may affect the reliability of the results. Explain. Guest: Well, I think the reason that a randomized trial is the gold standard--and I go to great length, in Uncontrolled, and this will be old news to many of your listeners--is that we want to try and identify the causal effects of the treatment, in this case access to insurance, that is being offered, in isolation of all other factors. And of course, economists and analysts of various kinds attempt to hold all factors equal between two groups, one of which got a treatment and one did not, through various mathematical methods--regression, matching, and other things--which attempt to say, well, I can see what tends to create different outcomes in the outcome metric of interest and make sure that the people I'm looking at with the treatment are matched up against people who are alike in all material respects as a control group. And the problem of course is we can have unobserved variance. In other words, there may be differences between the people who are in the treatment group versus the control group that we just don't have data on or can't model. And therefore we cannot be as certain that we have equivalent groups in the test group and the control group other than the treatment of interest. If we randomly select individuals into the test group versus the control group and we'll get into this I'm sure in detail, subject to sampling error, I know that even if there are factors I haven't thought of, I should have them approximately equally distributed in the test group and the control group. So, therefore, when you come to an experiment, there's a question, which is: Well, at the point of random assignment, I know that assumption is true subject to sampling error. That is, at the moment at which I ran the lottery, and I said, you win the lottery, you lose the lottery, I have two groups that should be alike in all material respects, subject to sampling error. As soon as I start to take subgroups of the group that won, I immediately find myself back in the same problem: How do I know the subgroup, which is the 60% who submitted the application, and of those, the ones who were eligible--how do I know which of the people who lost the lottery are most like them? And how do I know how similar they are? And running the analysis such that you simply compare the group that won the lottery and compare their outcomes to the group that lost the lottery is called the 'intention to treat' principle. And that is if you are being strict about only using a gold standard in a randomized trial--that's how you measure it. Now, what the authors are interested in is, what is the effect, not of winning the lottery, of being granted Medicaid? And I talk about this at length in in Uncontrolled when I talk about lotteries for school vouchers. And what I say is: It's the bacillus of econometrics, is introduced, because you have to basically do some kind of modeling to say, I'm going to look at the characteristics of those individuals who are the subset of those who won the lottery, who actually got the treatment that I'm interested in, and compare it to some subset or some adjusted benchmark for those who lost. And it means that you lose some of the reliability that you would have if you measure on an intend-to-treat basis. Russ: Now, in this particular case, I'm going to use the word 'prudence,' which I like because it's an Adam Smith word. Adam Smith talks about the virtue of prudence, that you look out for your own well-being, that you are not reckless. So, if I understood what you wrote correctly, in your essay, it's possible that the people who chose to apply were more prudent than the ones who didn't apply; and therefore when you look at the control group, which does not select out for prudence--it has a mix of prudent and imprudent people--you are attributing some of the, whatever the effects that there are of the Medicaid study, some of that may be due to prudence rather than just Medicaid. Is that an accurate way to say it? Guest: Yes. And I think that if you look at all the treatments that are reported in the headline results, they are the treatments that are estimated for the effect of being on Medicaid. If you were to instead say, I want to measure the treatments such that, I want to measure what's the causal effect of winning the lottery, versus losing the lottery, you can essentially take any of the estimated effects in the headline results in the paper and divide by 4. It's about 24, 25% of the effect, which you would expect, because only a small subset, something like 30% or so of those who won the lottery, got the treatment. And one of the things I argue in my book--and this is consistent with how a medical trial is classically run, this is consistent with the first known clinical drug trial, which is the Pertussis Vaccine Trials of North Virginia in the 1930s, you measure the effect at intend-to-treat; you apply the principle of intend to treat, because you are so concerned about this problem of how do I know that there's some subset of the test group is really comparable to some subset of the control group. And really all the arguments that I made in that essay simply become a lot stronger if I just take all the effects and divide by 4. Which is what you would do on an intend-to-treat basis. Russ: Explain that. What do you mean, I divide by 4? Guest: Well, one way to look at this is to say, I have 35,000 people who won the lottery, and I have, you know, 90,000 minus 35,000 people who lost the lottery. And what I'm going to do is to measure, ideally, I'm going to measure blood pressure for all the people who won the lottery and all the people who lost the lottery. And I'm going to look at the change in blood pressure for those who won the lottery versus those who lost the lottery, and I can ascribe the change in blood pressure by this example to the causal effect of winning the lottery. Our intuitive belief is, the mechanism by which winning the lottery is improving, or not, blood pressure is that a subset of those who won the lottery were given this Medicaid, access to Medicaid, which is "the treatment." Being able to say: Oh, but I know that there is, all of this effect is due to, for the subset of people who won, is due to being given the Medicaid treatment is a less reliable conclusion. And so the strictest way to look at this--and the authors are great. I mean in the supplementary appendix, unlike many of these papers, they went through the details of what the intend-to-treat effects were, if you do the analysis on an intend-to-treat basis. The strictest way to look at this is to simply say: The treatment I know I've randomized against is winning the lottery. And so the statement I can make with confidence is--scientific gold standard, it doesn't mean philosophical certainty--with high confidence is, the causal effect of winning the lottery is x. And it is intuitively going to be much lower per person, given that intuitively we believe that at least a large portion of the reason why some subset of the winners or some subset of the losers will have improvement is because only some subset got access to Medicaid. |
| 19:42 | Russ: So, another way to say it is, there's this group of people who won the lottery, didn't apply; and we're going to presume that they didn't have any effect, because they didn't get the treatment. Is that correct? Guest: That is the assumption; that is the essential, that is the basic assumption that is made when rather than doing an intend-to-treat analysis, you do an analysis which tries to evaluate the effect of winning the lottery and getting coverage. The problem with doing that is, what we don't know is, what we just talked about is, is there some unobserved bias among the winners of the lottery for those who actually achieved Medicaid coverage versus those who did not. In other words, to go back to what we were talking about a second ago from the essay, if I assume, for hypothetical purposes for the moment of this discussion for the moment, that effectively out of the lottery winners those who went through the process of getting themselves registered are different, in terms of their prudence, in terms of their behavior over time, than those who won the lottery but failed to do that-- Russ: Self-discipline, all kinds of unobservable measures-- Guest: Exactly. Conscientiousness, plus, you know, that kind of rigor. If that's true and I'm comparing now a subset of people who won the lottery who are prudent, and looking at their change in health outcomes, to a mix of other people who are a mix of prudent and imprudent, I am going to mis-ascribe relative improvements in the prudent subset of the lottery winners to the effect of Medicaid coverage, when in fact it's the effect of this prudence mixed with the effects of Medicaid coverage. Russ: So, when you say, divide by 4, you are saying: This is sort of a lower bound, is we're going to assume that the people who didn't win the lottery would have been very imprudent and wouldn't have taken any of the medication and therefore wouldn't get any effect equivalent to the control group. Guest: That's conceptually correct but it is also the case, but the number I gave came from, in the supplementary appendix to the paper, the authors report the results of doing exactly the analysis I describe, which is: I take the whole group of lottery winners and compare them to the whole group of lottery losers. They actually report all the statistics on it. Russ: Because they have the data on the lottery winners? Even though they didn't get the treatment? Guest: As far as I know. Russ: Okay, okay. That's totally different. I misunderstood that. That's very cool. Let me go back the other way. Let me argue that the experiment understates the effect of Medicaid. Because not everybody has high blood pressure. So, why would I expect--since high blood pressure is only a particular portion of the population, I wouldn't expect most of the people to benefit from that. So as I add people, if I increase the size of the study, a lot of these people aren't going to have high blood pressure. So, should I include those? Are they included? Guest: Well, you can think of it as: There's just a treatment. The treatment is anything. It's any change in the environment created for the test group or the treatment group versus the control group. And the treatment in this case is, I have a group of 10,000 or so people, and they now have access to Medicaid, and I compare them to a "like" group who do not have access to Medicaid. And the causal Pachinko machine of how access to Medicaid is going to play through to my blood pressure being different, my blood sugar being different, my cholesterol being different, is extremely complicated. For some set of people, they are going to have Medicaid coverage and they are just not going to go to the doctor. Other people will go to the doctor and they'll be diagnosed with some disease state that results in some clinical treatment, like you are now going to get this drug. And some of those people take the drug and some won't. Some will be misdiagnosed. Some will have no clinical state relevant to blood pressure and be given medicine for something else, which will have-- Russ: Side effect-- Guest: You know, it's going to raise my blood pressure and make it worse. What we're doing is not trying to peel apart all those sub-effects here and simply asking the most basic, what's called an A-B split: You get the treatment; you don't get the treatment. Just measure the outcome difference between those who got the treatment versus those who did, where the treatment here is not a clinical treatment. The treatment here is Medicaid coverage. Russ: Medicaid coverage. |
| 23:55 | Russ: So, let's go over the basics now. Were you surprised that there was no improvement? There were a lot of people who expected this to have wonderful effects, maybe not on mortality, which is hard to measure in two years, but certainly on things that are thought to be related to mortality. We mentioned in recent podcasts with Eric Topol and Austin Frakt that having a lower cholesterol level might not have a very big impact on lowering your mortality. But putting that to the side, are you surprised that having access to Medicaid did not significantly improve the physical health characteristics of the people who were enrolled in the program? Guest: It didn't surprise me. Two huge caveats are, 1. I'm so not expert in the subject that my surprise or lack of surprise does not have a lot of information content; and 2. the only reason it didn't surprise me is, out of interest in the methodology, I'd looked at the only prior randomized study, which looked at the effect of varying levels of health insurance coverage, which was the RAND study of 30 years ago, which showed no effect. It really surprised me when I looked at the RAND study that it had no effect. So, prior to having seen the one prior randomized experiment, it was shocking to me, actually. But because that essentially established my prior, no, it didn't. Russ: And the RAND study, it showed no effect on health care outcomes. It showed, like this study, an increase in health care usage. But tragically, not an increase in health care outcomes. Guest: That's correct. Russ: Now, Austin Frakt, when he was on the program a couple of weeks ago, said it's not surprising the results are not significant because the experiment was 'underpowered.' Now, underpowered is a technical term in statistics. Explain what he meant by that and whether you agree with him. Guest: Well, the power in a statistical experiment, and I often use this analogy, is sort of like the magnification power on the microscope you probably used in high school biology. It has on the side, 4x, 8x, 16x, which is how many times it can increase the apparent size of a physical object. And the metaphor I'd use is, if I try and use a child's microscope to carefully observe a section of a leaf looking for an insect that's a little smaller than an ant, and I don't observe the ant, I can reliably say: I don't see the insect, and therefore there is no bug there. If I use that exact same microscope to try and find on that exact same piece of leaf, not a bug but a tiny microbe that's, you know, smaller than a speck of dust, I'll look at it and I'll say: it's all kind of fuzzy, I see a lot of squiggly things; I think that little squiggle might be something or it might not. I don't see the microbe, but I can't reliably say that therefore there is no microbe there, because trying to zoom in closer and closer to look for something that small, all I see is a bunch of fuzz. So my failure to see the microbe is a statement about the precision of my instrument, not about whether there's really a microbe on the leaf. And I think the argument that Austin Frakt has made around this is: This experiment, because basically the sample size, the number of people in it with different disease states, is an instrument which is sized so that it cannot, does not have sufficient precision to find the size of the clinical effect a rational and informed observer would expect there to be on these health care outcomes. Russ: So, to summarize--I know you are going to challenge this maybe in a minute--but to summarize what the fans of the study and fans of Medicaid and fans of health insurance have argued, is: Well, there is a lot of positive effect on cholesterol and on blood sugar and on blood pressure, but they weren't large enough to be distinguished from random effects. But that's just because the sample wasn't big enough. The alternative view is that, well, the effects weren't very large. If the effects had been large enough, then even a small sample would have identified them. But Austin Frakt has argued that, well, no, even if it was a big sample, it would have required huge effects. I don't know if you looked at his calculations or not. Guest: I did. So, I think we have to be careful about what we mean by 'large effects.' So, there is, what some people have called 'clinically large,' or 'clinically significant.' Like, I care about this outcome, it's that big a deal. Or alternatively, and I think this is, the second of these, is the sense in which Austin Frakt has made the argument, is: If I think about what a rational, informed observer--that is, someone who knows about what we would expect given the package of treatments that would be applied against this population and the starting disease state of the population and how we know medicine works--would the expected effect we think we would normally see by applying this treatment called 'Medicaid coverage' be large enough to be detectable by this experiment? And so, I think a simple way, and a straightforward way--I don't want to restate his argument for him, and Kevin Drum has made the same argument, but I think I'm being fair about this--is, look--and I think this point of view is internally logically consistent and an intelligent point of view--which is, basically, look: your experiment is sized, it's designed--sample size means it can read an effect of size x--when you look at what you would expect a clinical effects of the benefits being accorded through Medicaid coverage to be for this population, it's like 1/20th of x, is the change in improvement in health you would expect to see. So the fact that when you use this child's microscope to look for a microbe, an experiment that can find the size x, and it didn't find any statistically significant effect when really we would expect it to be a 20th of x, well, you got no new information from this study. Sure, of course it showed you no significant effect, because you would have to get, you know, a gigantic multiple of what by biology and clinical experience should say we should get from applying Medicaid. I mean, I think that's the basic argument. |
| 30:02 | Russ: That's their argument. Do you agree with it? Guest: I think that--I listened to your podcast because I was going to do this podcast, and he comes across to me there, as does Kevin Drum in his writings, as smart, informed, and a readable guy. Russ: And by the way, just to interrupt for a second, I'm going to invite Austin to write a response to this podcast, which I will post, I hope, as an early comment on the EconTalk page, as well as on EconTalk's Facebook page, which is now available for liking, so please check that out. So, carry on. Guest: So I think the whole issue then is calculating these numbers, going from this conceptual argument of, you can measure at size x and the effect should be, say, 1/20th of x, to actually calculating the two numbers. One is often described as 'the power of the experiment' is x, and the expected effect is this other number, which is smaller. So, you know, when it comes to calculating the power of an experiment, which is basically saying how small an effect can it measure reliably, well, you know, I know how to do a power calculation, but I don't know how to do a power calculation for somebody else's very complicated experiment without access to the underlying data and their analytic method. And second, when it comes to saying, well, when applying Medicaid to this population, what change would you expect in, for example, blood pressure, I don't begin to know how to do that. So, you know, I don't know how to calculate these two numbers. The only case in which, that I'm aware of, in which the authors of the study have made any statement about these two numbers is the case of diastolic blood pressure. So--and this is actually on Austin's blog. So, the lead author of the study, in response essentially to this argument, in correspondence said: Well, take diastolic blood pressure as an example. And so, diastolic blood pressure is the second or lower of the two numbers in your blood pressure reading. So, if you are 110 over 70, it's 70. And what she said, and this first number you can take right out of the study, which again, if you accept the analytical premises which you talked about before in the study, the author of the study says, well, we can read an effect of a reduction in diastolic blood pressure of around 2.65 points; and for some technical reasons if you look at a subgroup, that might be relevant; it's a little more than 3 points. So, essentially, in rough terms, the author of the study asserts the power of this experiment for reductions in diastolic blood pressure is about 3 points. In other words, the average person I think had about a 76 blood pressure reading, it was in the study; so, they could read if the average went from 76 to 73; in test versus control, they would be able to say that's a real effect we can measure and call that statistically significant. So then the question is, well, I don't know, would you expect this kind of coverage as an informed observer, would it be like a twentieth of that, which is a small fraction of one point, or would it be you know, ten times or around that? And her assertion is: Look, the benchmarks for what a reasonable expectation of the effect of this coverage are, are two, one of which is the RAND study, which measured an effect of a 3 point reduction in diastolic blood pressure. And the second is another study, which measured a reduction of 6-9 points. So even if I take 6-9 as, what, 7.5, the average of 3 and 7.5 is 5.25, right? In other words, in this case, for diastolic blood pressure, according to the author of the study, it's not x and 20x, it's, you know, x and more-than-x. You can measure down to 3--the precision of that microscope can go down to a measurement of a size of 3; the effect they would expect is 5. Russ: So, I got lost there. So, from past studies, you might have expected--the opportunity to be on Medicaid for two years might lower your diastolic blood pressure by 5 points. Not percent. Five points. Guest: Right. Russ: 76 to 71. And they found a decrease to 73. Guest: No, what they--if they said what the precision of their instrument is a 3 point reduction would be measured as a statistically significant reduction in blood pressure. So, in other words-- Russ: So there was sufficient power to measure what they could have--they could have found 3. Excuse me. The study was sufficiently powered, meaning the sample was large enough that if it fell by 3 points, it would have been statistically significant. It could have been. And certainly 5, which is, 5.25 or so which is the average of two past studies. Although I presume one of them wasn't statistically significant either, which was the RAND one. You said it was 5 points, but if I remember correctly it didn't find-- Guest: Three points. It was 3 points; the other study was 6-9 points. Russ: Oh, sorry; RAND was 3. So that sounds like the author was saying that their study had sufficient power to measure what could have been expected reasonably from the effect of the treatment. Is that correct? Guest: That's correct. Russ: What did they actually find? Guest: They actually measured a little less than a 1 point reduction, so a -0.81 point reduction. Russ: Okay. So that brings me to my next point, which I think is a very important general point that is lost in I think 99% of these kind of discussions. Guest: Let me just make a quick comment about the argument I just made, which is: I don't have any idea, other than the author of the study presumably has studied this in detail. The things I know about in the study are extremely well done. I'm assuming, without knowing, that that is the valid way to create the clinical benchmark, like is 5 a reasonable number to expect. And I'm also assuming that, because she provided this as an example, it's not the case that if you looked at 15 metrics, she picked one metric where they had power and not the 14 where they didn't. So, I don't know about that. And I think the project often that's undertaken, which is figuring out what the power of this experiment is and trying to create these prior benchmarks, what would be reasonable expectation against these clinical effects, I can't possibly comment on. I just don't have the expertise to comment on it. All I'll say is, in the one case where the study author has commented on this, they are claiming it has power. Russ: So, Megan McArdle ran your essay at the Daily Beast, and I don't know if it's run anywhere else. I don't know if it's posted anywhere else. But Megan made the point that the authors of the study were probably aware of this. About this issue of power. Obviously when they designed the study they had some expectation of what sample size would be necessary to measure independent experimental effects of the experimental treatment. And they didn't go into this blind. And they didn't write a survey or a study that said: Of course, we're not going to be able to measure this with any precision. But we'll let Austin respond to that. Guest: Well, I think that a point there is, they didn't design the study. It was a lottery run by the state government. They didn't set the sample size. So, I could easily see--I'm not saying this is the case--but I could see an argument that says, look, we were dealt a hand of cards; we did the analysis on it; there was no reason to do a power calculation in advance because we didn't control how many people were on it; we were just trying to learn what we could out of this. So, I do not make the assumption that they did prior power calculations and knew this was correctly powered. Russ: Good point, fair enough. Guest: I don't know. Russ: Fair enough. |
| 37:33 | Russ: Here's the punchline. And for those who are tired of hearing about Oregon and Medicaid, I think this is an incredibly important point. And we have one more coming. For those who are lost in the weeds, there is an incredible punchline coming in a minute from Jim's analysis of the survey, which blew me away. But I want to make this point first. In the social science literature--I'm sure in other literatures, but overwhelmingly in the social science literature, certainly in the epidemiological literature--everybody is obsessed with statistical significance. Which means: There was an effect that could be attributed to the treatment--or to the causal variable we are looking at--independent of chance. And the gold standard is 95%. That, if we find a result, if we find a difference between the control group and the experimental group that is statistically significant, what that means is, typically, that there is a 95% chance that this is not due to randomness, but it's in fact due to the treatment itself. Correct? Guest: Technically, the p value, or the 1 minus 95%, or .05, is the probability that an observation as extreme as that data would occur by chance, given that the true effect was 0. Russ: Given that the true effect was 0. Thanks for that. Correct. But that obsession misses the much more, probably much more, important point, which is the magnitude of the effect. The fact that it is statistically significant is often not nearly as important as whether the effect is large. So, just to take an obvious example, expanding Medicaid coverage, which is part of the Affordable Care Act (ACA), known as Obamacare--it's expensive. It costs a lot of money. So you care about not just whether it changes people's blood pressure and cholesterol level and mortality. You care about whether it changes it significantly--not in the statistical sense of 'significantly,' but in the everyday sense, meaning a lot. And unfortunately, the word, the phrase, 'statistical significance', is a misleading term. Not deliberately misleading, but for nontechnical people it makes you think it's significant meaning important. All it means is that it's not due to chance. If the effect is small, then the effect could be statistically significant but policy-wise insignificant. And so this last example is an unbelievable, is a perfect example. Let's pretend they had found that in fact the reduction in blood pressure was statistically significant. Wow! Medicare coverage has an effect on blood pressure. But if it's less than a point in reducing your blood pressure, it's insignificant in the full, real sense of the word. Agree or disagree? Guest: Well, I--the general point, there are two different meanings to the word 'significant' and it is misleading when you use it in the technical sense in a lot of dialog where people assume the common sense meaning of the term, I definitely agree with. I wouldn't jump to the conclusion that at one point reduction in average blood pressure is not clinically significant, just because it could be that what you have is 99% of people are at, you know, 75, and you have 1% of people that at 140, and the way you got the 1 point reduction was take that 1% of people and bring them down substantially. Russ: And that's my earlier point. Right? Your point is that this was for the whole population, so that mixing in people who you wouldn't expect to have an effect. Is that right? Guest: Yeah, that's right. So you can get to a one-point average by a small population with a significant move. And that could result in a material reduction in total mortality for the group, because one of the points I make in the essay is, if you just think about the numbers, right? If you choose--and I don't want to get to a debate about how many people are insured or uninsured in the United States, but if you use a conventional number like 50 million people are uninsured, and you say a reduction in a probability of 10-year mortality of 0.0001--that's 5000 people. So, until we start to trade off against costs and closing off other reform options, basically any change in mortality probability is going to be morally significant. You are going to have to then get to the issues that you point to, which is that: okay, but then I think there is no free lunch. Might not be enough to get that. Russ: So then, let me correct what I said. Let me say it a little more elegantly, then. When you look at policy significance, rather than statistical significance, if you want to see whether a result is important, you have to look at its magnitude. Your footnote to what I said is that sometimes what looks like a small number is actually larger than what you may think. I take that point; I totally agree. |
| 42:25 | Russ: Let's move on to what I think is probably the most interesting thing in your essay--all these things were interesting, but the most interesting was related to what is known as the 'Framingham risk score,' which is related to a longitudinal survey. Correct? It's called the Framingham study, that looked at a large group of people over time and tried to measure their chance of a heart attack. Is that correct? Guest: It's cardiovascular disease. So that's not just MI, it's a variety of indicators, negative outcomes, cardiovascular outcomes. And how was that risk score--what's it composed of? Guest: In this study, there are different versions of it, and I am not an expert on building up Framingham risk scores, but in this study, the variables that are used are age, cholesterol levels, blood pressure, blood sugar, um, whether or not an indicator, whether or not you are using medication for high blood pressure and smoking. So, effectively there's a formula which combines those factors for any person. And from that computes a number, which is your Framingham risk score. Russ: And that score, for the experimental group, went up. Correct? Guest: For the experimental group as a whole versus the test group, it went down very slightly. For those in the test group who started sick, who started with, um, um, an elevated risk because of diabetes or hypertension or high cholesterol, uh, etc., for that group it went up. For the overall population of the test group versus the control group, it went down extremely slightly. Russ: For the group that went up, though--for either of those, it was not statistically significant. Again. Guest: Right. That's correct. Russ: However, you made the point, the observation, which was hidden away in Table 5--I paid for the study, by the way, so I won't be able to--I'm now talking about the summary, the results from the New England Journal of Medicine, so if you want to pay, I think it's $15, you can get it; we may be able to put up Table 5 or some piece of it, I'll find out. But in Table 5, you noticed something rather extraordinary about the test group, which was? Guest: Well, the estimated effect of coverage, which was statistically insignificant, was an increase in the incidence of smoking in the test group versus the control group. In the control group it was about 43% of people who smoked. And the causal effect as indicated by the study was a 5% increase, 48% smoking in the test group--which was not a statistically significant result. So you would, under conventional standards, which I support, you would not ascribe that as a causal effect. You could not reject the hypothesis as random chance. Although interestingly-- Russ: It is close. Guest: The p-value is closer on that than essentially everything else we have been talking about in this study. Russ: Yeah, if I remember, I think it was .18. Meaning there is still some chance, there's a good chance--well, 'good' is a bad word. There's an 80% chance that this was just due to random variation. Correct? Did I say that right? Guest: It's the other way around. So, there's an 18% probability that an observation that extreme could occur by random chance, if there were in fact no causal effect of Medicaid coverage on the probability of smoking. Russ: Say it again one more time. Go ahead, try again. Guest: I think the way to say it is there is an 18% chance that an observation that extreme or more extreme in terms of the difference of the test or the control group would occur by random chance, given that the null hypothesis is correct. That is, that the true absolute causal effect of Medicaid coverage on smoking is not. Russ: So, if the p value had been .03--say it the other way around. So if it had been .03 we would have concluded that, it's very unlikely it was due to chance. Guest: That's correct. Russ: So, 18 says it was an 18% chance it was due to chance. And of course it's an arbitrary measure--.05 has become the cutoff for what is by chance or not. So in this case, like all the other results, we would conclude that, like the--we can't reject the hypothesis that this is just random. We can't attribute it to being on Medicaid. But you discuss the possibility that it might be attributable to Medicaid. And what was your argument? Guest: Without respect to, without pinning it on this finding, I think there is a well-known effect that is often called the seat-belt/speeding effect, which is-- Russ: Yeah. It's called the Peltzman effect, also. He was the economist who found the seatbelt effect. Go ahead. Guest: So, the basic idea of it is, if I reduce the cost of a risky behavior, I will, on net induce the incidence of that risky behavior. Because the thing that I've changed is the cost of the bad outcome is not quite as bad as it used to be. And so I think the application here, is, if you reduce the cost in the broad sense, not just the monetary sense, to me of the negative outcomes of smoking, even though smoking on balance is still bad for me, it is less bad than it was the moment before I reduced the effects of having negative health outcomes. And there is literature that shows, in non-experimental settings, and I think I make the point in the piece, that I don't put a lot of stock in non-experimental findings about this, but there is a literature that says that in fact if you do see an increase in risky behavior, if and when you grant additional medical coverage. |
| 48:27 | Russ: So, I'm skeptical about that. And it's fun. I'm a fan of the Peltzman effect, which is again, for jargon fans, it's an example of moral hazard. You've made it cheaper to take risk, and so you expect people to take more risk. It's a little hard to believe that if people would start smoking, knowing they could get treatment for lung cancer in 30 years, that before this they said, eh, it's too risky; and now they are thinking--and subconsciously; it doesn't have to be a conscious, rational decision--but now they feel a little more secure, so they start smoking. I found that a little bit-- Guest: I think it's extraordinarily unlikely that that would happen. I think if I were to tell the story of how this might happen, it would be much more likely I would delay quitting. Russ: Yeah, that's a good point. Guest: People who are already smoking who decide--it's your point, consciously or not--delay the decision to quit. Or gave up. Many people who quit smoking have 6, 7, 10, 12, 15 attempts. Gave up on those attempts and got to the 8th attempt before they succeeded, as opposed to succeeding on the 6th attempt. Russ: Yeah, Mark Twain-- Guest: I do not know any of that is true. I'm simply saying that would be a more plausible reason, I would think. Russ: Mark Twain said: It's easy to quit smoking, I've done it a score of times. But the more interesting case--I don't know if you mentioned--to me the more likely case is financial. That because the experiment reduced financial stress on people--the experimental treatment reduced financial stress, because you had this inexpensive source of health care once you were covered, you had more money to spend on lots of things. One of which would be cigarettes. Guest: Yep. Could very well be. I did not say that only because I never thought of it. Again, I'm not asserting that to be--the way you described, to know that to be true; but it certainly sounds plausible if you saw an effect like this. Russ: The other thing I found striking--I think you did mention this--is the proportions themselves, the level. It's a very high rate of smoking. Guest: It is. Basically, that's right. The rate of smoking in this time period, a few years ago, of basically 19-54-year-olds in the United States was a little under 25% by the research that I did. And so you are really talking about a group of people who are smoking, roughly speaking, around twice the rate that you would expect for people that age in that time period. The obvious observation is, smoking is an incredible class marker in the United States. Russ: Yeah. Guest: I've been living in France for the last several years, and it's one of the things that's so striking about the incidence of smoking by someone like me, or I suspect you. If you went to Paris and walked around, there is a higher incidence of smoking. But it also seems dramatically higher relative to how it really is because it is less class-defined, granted, than in the United States. Russ: Right. I don't know if I know anyone who smokes. Except the person who worked on the drywall of my house in the bathroom renovation a few months ago. |
| 51:32 | Russ: Do you want to say something about the depression findings? I did a little looking into that. Did you look into that at all? Guest: Not seriously. I only read other people, who talked about it, and I think the two big issues--and one of the reasons I didn't write about it is that this thing is really long, but also I didn't really do the work to be confident about an understanding of it. But I believe that a key issue to remember when you see a significant reduction in depression is that apparently it all occurred within the first month of the study. You can see it immediately. So it makes it much less plausible that this is an effect of actual treatment and the application of drugs and various other kinds of treatments. It is more like what you would think of normally as a placebo effect. I'm not saying it's true. I'm just saying that--given that, I've read, when this happens that quickly, it certainly raises that question. The second issue, of course, as always, with most psychological conditions, construct[?] validity. So, the thing we measured by asking questions on this form changed what does that mean about when people normally mean when they intuitively describe mental state and depression and so on--to me that's probably a very tricky question to answer. Russ: Yeah, I went and looked at the survey that they use to measure depression. Let's pull it up here. It's basically 8 questions. I just thought this was fascinating. It's eight questions. I'll read them very quickly. When you answer the questions on the form, you answer whether this occurred not at all, for several days, more than half the days, or nearly every day, over the last two weeks. And they are things like: "Little interest or pleasure in doing things. Feeling down, depressed or hopeless. Trouble falling or staying asleep, or sleeping too much. Feeling tired or having little energy. Poor appetite or overeating. Feeling bad about yourself. Trouble concentrating. Moving or speaking slowly that other people notice." And of course, many of those characteristics we all have, lots of times. And the question is: What does it mean to get 10 points on those questions. And again, as you point out, that's what you call a 'construct validity.' It's an interesting issue. But the people who were in the treatment group did have a reduction. And that is, at least one--and it was statistically significant--so it's at least one thing positive we can say about the experiment. |
| 54:04 | Russ: So, we're almost out of time. I want to thank you and I hope the listeners heard how careful you were to make claims. And I believe that is the right way to avoid confirmation bias, or at least maybe the right way to say it is you seem to be fairly good at avoiding confirmation bias. We're very careful, many times in this conversation, to hedge what you knew versus what you thought you knew versus what you thought might be true, etc. I want to salute that, because I think that's wonderful. Where do you think we are now? Did we learn anything from this that we didn't know? What are its implications, if anything, for public policy? And then, the other question I would ask, given your background, is, is there an experiment that you'd like to design, or that you could imagine, that would do better than this that would do better in helping us move forward in health care? Guest: Well, I guess to take these questions in order, on the first of them, I think that according to the estimates provided by the authors of the study, we did learn something about the failure to move diastolic blood pressure. And I think by implication, though I don't know that, other indicators as well. I think it confirms rather than contradicts the results of the one prior randomized experiment, which is that something like this kind of measurement period it's very difficult to see changes, specifically changes in these physical health indicators. I don't think that means Medicaid's a bad idea or the ACA is a bad law, or anything like that; I don't begin to have the expertise to answer a question like that. I do think that if your support for that change is predicated on the idea that it's going to make lots of sick people better, physically, this ought to make you a bit more hesitant about that belief. The second question I feel a lot more strongly about my answer, and I thought about this a lot in Uncontrolled: I think the idea that we're going to do some experiment and we are going to slam our fist down on the table and say, now we've settled the issue, now we know the answer, is extremely unrealistic. I don't think there is any such experiment which is going to be able to settle policy debates once and for all. I think that therefore there is not the better experiment argued for here. What I'd argue is we should be embedding the capabilities to do lots of fast, cheap experiments in our distribution, in our execution of these kinds of programs, including Medicaid and similar programs. In other words, if we didn't have one experiment where we we are kind of trying to tilt our head and squint out of the corner of our eye to try to draw this one experiment which is the one we've done since the one 30 years ago, and instead we are looking at 85 experiments that were run last year across 50 different states, I think we would be able to draw much more reliable, practical, engineering conclusions about: Gee, it looks like this version of this seems to work well because we see it replicated nine times, yeah, none of these experiments is perfect but, you know, it seems to happen over and over and here's a surprising thing we thought should work and we can't figure out how to make it work. That to me seems to me how you make progress. It's lots and lots of fast, cheap experiments. Not the one moon shot that's going to settle the debate. Russ: Yeah, I think we have a lot of romance about randomized control trials like this, because they remind us of science. It's like, we've got the petrie dish over here; it has whatever; and another one over here. And that's science! So if we have a control group and an experimenal group, we're going to find the truth. We're not going to be confused by--and one thing I think listeners can take from this conversation and related conversations is the elusiveness of truth. That it's much harder, as you point out in your book Uncontrolled, and I think you do it very beautifully, in a world of what you call 'causal density,' where there's lots of different things happening and changing at the same time, and there are a lot of unobservable differences between groups, you should lower your expectations. Guest: Yeah, that's right. And I think in a very specific way. I think you really can find truth in a scientific sense. You really can find the right answer, the true answer to these questions about causality. It's just an experiment answers an extremely narrow question, always. It's not: Does Medicaid help or hurt? You know, what you answered is: When I randomized people to this lottery in Oregon on these dates, what was the causal effect of being randomized in or out of that lottery? And the reason you've heard me hedging all of the time is I've learned the hard way, as soon as you step an inch off that platform, not seemingly grandiose, but seemingly direct implications of that, you run into the danger of fooling yourself into thinking your knowledge extends more broadly than it does. That's when you need lots and lots of experiments. You build this picture of knowledge by a pointilist painting. By lots and lots of lots of experiments that get the answer in very narrow circumstances. But you can add those up to really useful conclusions. I think. |
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| 0:33 | Intro. [Recording date: May 3, 2013.] Russ: Our topic for today is the Constitution, and I want to start with a very broad overview. How has the role of the Constitution changed in the United States since the founding? How has our understanding of it evolved, good and bad? And that, of course, we could spend 7 or 8 hours on, but why don't you open us up with a general overview of the biggest trends. Guest: The biggest trend in the Constitution has to do, I think, with the change in Federal and state relations from the time of the Founding. The point here is that the Bill of Rights was not wildly important in terms of judicial action for a very long period of time, and that the major battles therefore were over the structure of the Constitution. And the issue was driven in large part, although it's often forgotten today, by the slavery question. The central feature of the great compromise that brought the United States together was the decision to allow the southern states to keep with their slave traditions and the northern states to keep with their abolitionist traditions, to the extent that they had them. In order to make this work, what you had to do is to limit, very powerfully, the ability of the Federal government to regulate activities that go within the states. And so at that particular point what happened is, you give the Federal government the power to regulate foreign commerce, which essentially allows it--not for the best of all possible reasons--to introduce protective tariffs, which were championed first by Alexander Hamilton, later by Joseph Story, and you give it the power to regulate commerce within the states--that is, transportation going back and forth between states. And also to deal with the very tricky questions of the relations with the Indian tribes. And the rest of it was supposed to be inside the states, with the state police power[?]. When you look at the Judicial System, it was also pretty much the same kind of arrangement. There was to be one United States Supreme Court to review various kinds of decisions. But it in turn was checked by a Congress which could limit the kinds of cases that it could take. And it was also very unclear at the Founding as to whether or not there was anything that the Federal government at the center could do in order to override the decisions of state courts which invalidated certain kinds of laws on Federal constitutional grounds, or more importantly, upheld them against challenges that were based on Federal constitutional grounds. So that what you did in effect was you had an institutional design which was intended to marginalize the Court in its original foundation, and to leave primary power in the federal legislatures and the President and the state legislatures and the state governors, as the case would be. And so, you have that as kind of a key feature with respect to the original constitutional design. There is also the question about what is the role of the Executive. And for the most part, the United States wanted a single executive with great power to execute but little power to create law. And so what they did in effect was to create a system in which the President--and it was the single President--had the powers of a commander-in-chief, had the powers to veto various kinds of legislation, had the power to pardon various kinds of individuals, and was charged with duties like making reports to the Congress like the way in which things went. But if you put the whole system together, the basic way of understanding it was that the Constitution was drafted as a way to get rid of the defects of the Articles of the Confederation, rather than to create the modern welfare or New Deal state. And so they had the President, which the Articles of Confederation did not have; it had a Congress with the power to tax, which the Articles of Confederation did not have. It did have a Federal Judiciary, which the Articles of Confederation did not have. And so what you did in effect was you found a way to get greater degrees of centralization, but the trick was to go far enough to allow the nation to operate as a coherent whole, but not so far as to allow it to squash the individual variations that took place within the states. That's the original design. By the time you get to the modern period, everything starts to change. The separation of powers at the Federal level is looked upon with a great deal of suspicion. And we see the rise of the administrative state. Uh, the notion of enumerated powers, particularly with the Commerce Clause, giving the Federal government only a limited ability to control the way things go within the state, is scrapped in favor of a system of concurrent jurisdiction, where basically on any kind of important economic issue, it turns out that the Federal government is entitled to act. And in its absence, the state government is entitled to act as well. But the earlier version--this is federal, that's state, and never the twain shall meet--was never in fact kept after the 1937 period. So it's a huge difference between a relatively lean classical state--small government, strong property rights--to a law state with heavy administrative law, concurrent jurisdiction. And lots of discretion that's being given to agents at all levels of government. So it's a really very, very big change that took place. |
| 6:03 | Russ: Now, you talked about the rise of the administrative state. Explain what that is, the 'administrative state', and when that rise occurred. Why did that happen? Guest: Well the 'administrative state' is not simply a state which engages in administration. I mean, every state has to have tax rolls, property rolls, voting rolls, public highways, and so forth. The 'administrative state' refers to the conscious effort on the part of government, to believe that essential industrial and academic--actually not academic--essentially industrial and manufacturing, commercial functions, or to be subject to a very strong degree of oversight by professionals. And these professionals are supposed to have the kind of scientific expertise that would allow them to manage an economy. And the general constraint on them would not be a system of freedom of contract in private property, but would be the political oversight that takes place by virtue of general popular election. Uh, the way it started was of course gradual, and the first area in which something was clearly needed, or people thought, had to do with the creation of a railroad industry. A network industry that went from one end of the country to the other. And so for the first time what you did was you saw heavy capitalized firms dominating industries, which were at a multi-state level. And the question of how it is that these things were to be regulated became a great challenge. So, in the mid-1880s, the Supreme Court case of Bobby[?] and the Wabash Railroad, sort of indicated that, you know, states could under certain ways, bond--control certain things that take place in their jurisdiction. And then when these decisions made it clear that there might be fragmented control over interstate railroads, in 1887, the Interstate Commerce Act was put into place. And this gave your first system of Federal regulation--the control over rates that railroads could charge. It was in fact quite an ingenious scheme. Because what it was designed to do was inverse the long-haul/short haul inversion. It's very common when you are dealing with network industries. So there are four railroad lines that run from San Francisco to Chicago, and they compete furiously for business. There is only one line that goes from Omaha to Kansas City. And so what happens is it's not a cost-based system of pricing. It's essentially a system which says you load all of your costs of the fixed network onto the smaller portion. So you are paying more to go from Omaha to Kansas City than you do to go from San Francisco to Chicago. And this enraged a lot of people, who didn't understand that this was a form of Ramsey pricing, which means that in effect you put the fixed cost of the system on the inelastic portions of the overall operation. Because otherwise you can't fund it. And so what they did in order to counter that was they required you to price the shorter portions on any individual leg at a price that was at least as great, rather, no greater than the price of running the long haul. So, they tried to control this long-haul/short haul thing. And then slowly what happens is the power to regulate the railroads expanded, so by the 1920s, what you did is you had a comprehensive system of rate regulation, and instead of trying to control these kinds of weird price reversal, what happened is that you now had a cartelization of the industry, courtesy of government. When the Progressives then take over again in the first part of the 20th century, we start to see the creation of the Federal Trade Commission. And this is, again, a very large administrative agency, and a very lot of what it is designed to do is to regulate trust-busting type activities--the Sherman Act had come on board in 1890 and the Clayton Act, which is expanded, it came on in 1914 with the Federal Trade Commission. And what happens is that the model is: Congress gives the broad outlines and the agency fills in the gap. And sometimes it's an anti-fraud device or a consumer protection device. Sometimes it's a trade practice device that's going to be regulated. And so what you do is you see more and more perception on the part of people in government that markets fail for informational reasons, monopoly reasons, whatever. And they want bigger and bigger regulation. |
| 10:10 | Guest: So this continues on a regularly steady trend until you get to the 1930s, when it mushrooms with the creation of so many of the major agencies that we have today. Russ: Let's stop there for a second. When we look at that trend--and you earlier identified 1937 as something of a turning point--there's a temptation to say: Well, we're in the middle of the worst economic downturn of American history, the Great Depression. [?] lost in markets; people naturally turn to the government for solution. But in fact these trends had been building for some time. And certainly the Progressive Movement, which--I don't know when it started, maybe late 19th century through the 1st-- Guest: About 1900. Russ: Yeah, about 1900. You get this view, at least this is the story, you get this view that now there is this cadre of experts of people who are clamoring to be expert about and who are lobbying the public and the intellectual class, who are very amenable to this idea that experts should have more power. So, this expansion during the Roosevelt Administration isn't so much a--in this view, isn't so much a counter-revolution to the, excuse me, a response to the Great Depression, whatever. It's rather just the building up of a lot of underlying forces that pushes in that direction. What's your view on that? Guest: Yeah. I mean, 1937 is in fact an extremely important date. Because it represents the final culmination of a movement that has been building for 40 years, on two dimensions. One on the Federalism dimension. It became pretty clear that there was virtually nothing with respect to comprehensive economic regulation. That was beyond the scope of Congress to regulate. Whereas beforehand it was actually quite different. You still had the older view that Congress could regulate interstate journeys, so that if you shift something across state lines in a truck and then you unload it and put it in a car, the truck would be in interstate commerce and the car would not. And by the time you get to 1937, all of the earlier concerns about slavery of course long gone, and now you could regulate whatever you want by way of manufacture, mining, and agriculture within the state, which meant that the Federal governments could really prop up labor cartels, from the National Labor Relations Act, and agricultural cartels, with the Agricultural Adjustment Acts, which were passed repeatedly in the 1930s, harkening back to an earlier period when these things were first introduced under Wilson. Who was of course a transformative, progressive president. But in the interim there are people like Herbert Hoover, so you get the Federal Radio Act in 1926 which is under the control of the Department of Commerce, which Hoover headed. And you see an expansion of government power there. Hoover also organized--it's interesting to remember--a conference which was designed to deal with zoning within states; and they proposed a uniform zoning law which became quite influential. And zoning was sustained as a constitutional matter in 1926, having been introduced as a legislative matter in New York City some 10 years before. So you see this pattern building up. And there is resistance by the old Court; there is reluctance on the part of various people in the Federal government to go the last 9 yards. And then when Roosevelt takes over and the 1937 Court transformation takes place, what's clear is that the progressives have dominated everything, and then, boom, a year later, we have to worry about race; and it's all of a sudden very clear that this model of complete government control and a lot of state power and a lot of Federal power is not going to work very well in the face of systematic segregation in the South. And so you get another permutation, from 1938 through 1954, where eventually in Brown v. Board of Education the Court acted as the super-est of super-legislatures when it struck down the whole state system of segregation, after having decided that it's just absolutely terrible to strike down a minimum wage or a maximum hour law. Constitution law does have this way of having strange twists associated with it. |
| 14:12 | Russ: So, what you are saying, if I read you correctly, is that the natural--I'm going to phrase it in a little hyperbole--the natural trend toward Leviathan, which is implicit in any coercive power, monopoly coercive power of the State, was actually restrained, ironically, by slavery and the need for the original Founding to show a respect for state authority that was easily ignored once the slavery issue was gone. And that that's the trend we're still riding today. Guest: It is very ironic. But it's quite clear that the cause of limited government was advanced by the institution of slavery, because it made Federalism a very important issue. Just the way in Canada it's an important issue because of the differences between Quebec and the English-speaking provinces that lay to the west. Russ: Explain 'Federalism'. A lot of people find 'Federalism' to be an awkward term. Federalism means--explain it. You would think it would mean the power of the centralized state. That's not what it means. Guest: No. It means almost exactly the opposite. A Federal system, as opposed to a unitary system, is best understood by going back to the Articles of Confederation, dropping the first syllable. And 'federated' means loosely affiliated, one through another, so that you are not dealing as strangers but on the other hand you have separate relations, separate governances with some degree of comity or cooperation between them. And the so-called Full Faith and Credit Law, whereby each state promises to give respect, full faith, and credit to the judicial decisions and the legislative actions of other states is a classic illustration of how Federalism works. So, what happens is you enter into a judgment against x in State Number 1, and that guy disappears to State Number 2, you want to go in and enforce that judgment in State Number 2 as the winning plaintiff in the first case. And the state, by having to give full faith and credit to it, means it can't say: Gee, we want to relitigate that case in our particular jurisdiction so we can be sure it gets right. And so federations in effect are loose alliances among states. And it's more complicated here because you've got the Federal government on top of it. So you have, in Federalism, to worry about state-state interactions and then Federal pre-emption or domination of things that the individual states can do. |
| 16:41 | Russ: So, let me ask a naive question, which I don't know the answer to. It's the kind of question my 14-year-old has been asking me lately; and we're going to get to him later, maybe. He's got a lot of questions that I don't know the answer to; it's partly why you are on the show this week. Guest: [?] Russ: Isn't it exciting? Now if a state, a particular state, passes legislation that violates the U.S. Constitution, or might be thought to--and we have a lot of experiments going on right now in social policy areas, marriage issues, drug issues--what's the legal issue there? What is the ability of a state to carve out its own set of legislation, that follows its own constitution but not the Federal one? Guest: Well, if you go back to the pre-1937 issue, [?], what becomes clear is that there's a lot of room for experimentation, not all of it good. So the most famous use of that particular metaphor about experimentation comes from a 1932 case, and it's a dissent by Louis Brandeis, a case called New Ice against Leibmann, in which he says that the laboratories are essentially the places--the states are laboratories in which we can have experimentation going on. And it's kind of like the trial-and-error mode of scientific inquiry: this state seems to make it work, that state doesn't; the one state that fails will imitate the one that does good, and by having these multiple experiments running simultaneously, you get a way to compare and to contrast. And that, in effect, is an effective constraint on limited government. The problem about that is that sometimes you know these experiments are failures even before they are tried. And in the case of the New Ice Company, what happened is the state, I think it was Oklahoma, which sort of announced that hey, we are going to have a cartel created for the sale of ice inside this state. An ice cartel. And, you know, you are trying to figure out why it is that you'd want to do this; and the only explanations that come up are forms of political influence and naked economic protectionism. And that was the thing that our friend Brandeis was defending. And the majority of the Court said, this is the kind of thing that the Federal Constitution doesn't allow, and it struck it down. And this is what the complication is. After the Civil War, it was widely understood that there were too few Federal constraints on what states can do. And this, of course, is the obvious consequence once you decide to strike down slavery. So what they did is they passed the 14th Amendment. And the way to understand it is as follows. What it does is to guarantee people fairly extensive rights. There is something called the 'privileges or immunities clause' of the 14th Amendment, which says, categorically, no state shall make or enforce any law that abridges the privileges or immunities of the citizens of the United States. And 'no state shall make or enforce any law'--this is a huge prohibition on what states can do. It's a kind of a veto power. And it's to be enforced mainly from Congress by appropriate legislation. So the Federalist system changed after the Civil War. And what was thought was that you'd have state initiative only, but you have Federal veto power. But what you did not have under the 1868 situation, where it was that the Federal government could initiate those kinds of rules that the state had to follow. That came only in 1937. So, the original version was: You states can do all kinds of things, but we've got this Constitutional protection out here so that you cannot engage in various kinds of dangerous activities. And the basic argument is this: Federalism is good because it creates tax competition; Federalism is bad because what it does is it creates land-use monopolies that the state can easily control through zoning regulations or entry restrictions of one sort or another. And the cleverness of the 1868 solution was it was an effort to have Federal vetoes over bad sorts of state acts while allowing the good state acts to continue to go more or less as they were. So experimentation is certainly not a bad thing. So, for example, one of the things that you discover is, you take states like, um, Illinois. Or Massachusetts. Still governed states. They have flat tax Constitutions, which makes a huge difference compared to places like California and New York, which don't have those things. So, you know, experimentation on tax rates, I can understand where that comes from. But experimentation in the form of entrenching local monopolies is the kind of thing that you would like to strike down. |
| 21:12 | Russ: Well, you were talking about the administrative state and I derailed you. I want to come back to that for one more minute. Given the expansion of the administrative state in our time, where we have agencies like the Environmental Protection Agency {EPA] and the Federal Communications Commission (FCC) and the Federal Trade Commission (FTC), they have much larger roles in implementing legislation. And the legislation is much broader and more ambitious. And it's inevitable, it seems to me, and in the current situation, because of the complexity of these regulations, that they have to work very closely with the industries they are regulating. Which opens up the possibility of regulatory capture. I know that the ideas behind these agencies are lovely--cleaner air, better air waves, more access. But how can it possibly be a good thing that this communication--and I'll add the financial sector to it as well. My voice, as Mr. Citizen, seems to be very quiet, given how much time the regulated industries must spend in the halls of power. What's going on there? Guest: Well, it's actually even more complicated than that. Your voice as a citizen is indeed ever [?] least subdued, but it would be a mistake to think that the regulatory capture model works unambiguously in all cases. The way this system is in fact organized, the people who wish to veto various kinds of actions are often given enormous kinds of power. So that what happens is you have an Environmental Protection Agency and you have the industry groups that are lobbying for relaxation of certain pollution controls, but at the same time there are well-organized environmental groups of one kind or another which are constantly suing the Agency in order to make sure that they impose even stricter restrictions on what's going on. So the Natural Resource Defense Council, whatever these organizations are called, are always very, very active in this kind of fray. And it's always very indeterminate as to who is going to win those kinds of struggles. First of all, the agencies themselves are often quite conflicted. Many of the people who are appointed to the agencies are not what you would call 'friends of industry.' Nobody would say, for example, that the leadership under the Obama Administration on the Environmental Protection Agency was pro-industry. The industry people lost most of the major battles with respect to that. So, there's a kind of indeterminacy at that level. The second point is that the issue about capture is not sort of an inevitable by-product of a well-organized scheme that somehow gets derailed. It is actually built into the statutes themselves. The most famous illustration of this has to do with the charter that was given to the FCC, which is created first by the Radio Act in 1926 and then it gets expanded jurisdiction in 1934 and it becomes the Federal Communications Act. And the administrative agency was delegated the power to make all rules and regulations necessary to advance the public interest, convenience, and necessity. Now, you mentioned that obviously we need the system to make sure there's no spectrum interference going one way or another, and that's absolutely correct. But the agency in fact by the courts took a much more aggressive view of the situation. And in the famous phrase of Felix Frankfurter in talking about this in the 1943 decision involving NBC, he said: It's quite clear that the function of the agency is not only to set the rules of the road--that is, to prevent interference on the frequencies, but it's also to determine the composition of the traffic. So that when you start to see the lobbying that comes on in this particular case, don't think of it as simply a question of abuse at the agency level. Think of that one at least as a very serious defect in the design of the system at the Constitutional level; at the Congressional level, when they didn't take the sensible position, which was to figure out how to assign frequencies that are consistent with one another and then auction them off to users for their hired use, that was a major Congressional decision. And it is perfectly consistent with their view that these experts in government are entitled to do all sorts of other things and to simply confine them to use the 'night watchman state' to use their own terminology would be a desperate error. So, what you do is you see the administrative agencies responding to the Congressional commands, and the Judicial system, which is not particularly convinced about the merits of a property system anyhow, accommodating them up and down the line. So it becomes a very, very erratic position; and it's extremely difficult, therefore, to generalize from one administrative scheme to another. Indeed, to generalize between one portion of the jurisdiction, the statute, to another. So the rules that govern, for example, the roles of air pollution under the EPA are very different in design and impact from the rules that govern water pollution. And it takes a very brave soul to be able to make jumps from one kind of organization to another. So, it's a really very complicated situation. And just like the Federalism situation, it's not just there's a tendency, one powerful push that leads to regulatory capture. What is unleashed is a whole series of initiatives by private and public parties alike which are constantly at war with one another, and you don't know the initial positions of all of the players, and therefore it's almost impossible in advance to predict what the outcomes will be. And it's also extremely difficult to know whether the courts are going to get their noses up with some of what these agencies do, or whether they are going to basically be highly compliant. So the [?] can only be described as expensive and chaotic. Russ: There's one other word I would add, which is 'non-transparent.' Guest: Oh, that, too. Russ: And the lack of accountability--if things don't go well--basically we're relying on that--not internecine, I was going to say 'internecine conflict'--it's wrangling, that takes place behind the scenes with the administrative court system. It's a bizarre way to run a country, which certainly isn't the way it was a while ago. But it's the way it is now. Guest: Yeah, but Russ, it's ironic. You used the word 'transparent,' and it's lack. The way in which we've achieved non-transparency is to publish so much information before any one of these particular proceedings take place, and nobody can figure out what it is that's going on. You get this outpouring of papers and stuff, and then, since nobody can assimilate it, what happens is the serious work is done behind closed doors. So you do get a nod toward transparency, but Lord knows how the sausages are made, to quote this book. |
| 27:51 | Russ: In a recent episode of EconTalk I interviewed Louis Michael Seidman, who had argued at the time in an op-ed, and I think it's based on his book, that we should just ignore the Constitution; it makes no sense to be beholden to a bunch of dead people who lived hundreds of years ago; they don't know anything about what we're doing; it's bizarre that we constrain ourselves that way. What was your reaction? I know you had one. Shockingly. Shockingly a negative reaction. Guest: Well, my reaction was negative. I was by no means alone. I don't even know what it is to ignore the Constitution. Do we start to say, in effect, that people can disregard the judgments of the Supreme Court? Does it mean in effect that when Congress passes a law by say, less than a majority vote, that we are going to so: Oh, 40% of the people are in favor of this in the House of Representatives, it's now a law? Certainly he doesn't mean all of that. The question is just: What does he mean? He was certainly in favor of giving certain kinds of protections for the 1st Amendment--speech. Well, that's got to be Constitutional and that's got to be enforced. There is a movement on the Left, of which Seidman is a part; his former colleague now at Harvard, Mark Tushnet, is a part; Larry Kramer, who is the former Dean of Stanford Law School is a part--which says that what we have to do is to return to the principles of popular democracy, in the way we elect public officials, is clear enough, but also in the way in which we pass our laws. So that for the most part whatever comes out of the Congressional or the state mill, if it is a reflection of "the will of the people", then the courts ought to yield to it. Because otherwise, to use Kramer's famous phrase: Instead of having 'we the people' what we do is we have 'we the court' deciding things. My own view about this is I just think it's much too crude. There is no question that any appropriate constitutional theory has to be able to find a series of structural constraints that existing legislatures are not in a position to avoid. But on the other hand it has to give them sufficient power so as to be able to make sure that you can upgrade a government to deal with the technical and the legal and the moral challenges, and the international challenges, of a [?] age. The issue that you'd want to then ask is just exactly how it was that the folks in 1787 did[?] understand that exact precise dilemma and whether or not they picked the series of institutions and rules which actually gave you the needed flexibility where it was required but gave you the needed structural regularities where that was required as well. So you have to be able to figure out whether or not they did a good or bad job. So, for example, I think that the old device, wholly apart from the slavery question, of having competition between states in the organization of such general policies on such things as taxation and then having the Federal government with the power to make sure that no state could blockade trades across state lines, that's a kind of a structure that works very well in the age of the Internet, the airplane, the railroad, as it does in the horse and buggy stages. So that I don't think there was anything whatsoever wrong with that original structure of enumerated powers. And that the risk of factions, which later becomes the risk of public choice captured is in fact one that was real in 1787 and it's one that's real today. So, if you look at the Constitution and you sort of ask yourself which of its provisions seem to have durability that outlast the time of their creation, I would say a very large fraction of them do. And the ones that clearly did not--the three-fifths clause on racial voting and the fugitive slave provisions that dealt with the duty to return escaped slaves to their owners and so forth--those things are all gone. Does this mean that we have a perfect Constitution? No. But ironically, if you then start to figure out what some of the great achievements are, it's actually through more Judicial intervention rather than less. Let me give you one example. If you look at the Constitution on this key question of interstate trade, it says: Congress shall have the power to regulate trade amongst the several states. And what typically happens is Congress doesn't regulate trade very much amongst the several states. And what the states then try to do is to create all sorts of barriers to make it more difficult for merchants out of state to compete with local people. And what the Supreme Court has done under the so-called 'dormant' commerce clause, it has basically inferred that in the absence of Congressional legislation, it is its duty to essentially make sure that we preserve the basic outlines of a competitive economic union, much the way the early economic union was in Europe. So that states cannot impose differential barriers on foreign trade and commerce, or foreign merchants coming inside the state, so as to create a nationwide common market instead of having a Balkanized market with either 13 or 50 states. It's been a great intellectual achievement. They make it very clear that this doesn't allow you to admit poisons into the rivers of another state or to introduce native wild species into a particular community which will kill all the local fish and habitat. Essentially what they did was they invented a classical liberal doctrine. Now, if you take Seidman seriously, then presumably you are going to go back to the kind of state relationships which essentially allow you to have this provincialization take place. I can't think of anybody who would really want to do that. You are going to get rid of judicial review; you are going to have to say: Gee, well really shouldn't the people in the state of South Carolina decide whether they want to continue with segregation? And by the way, why don't we want to have any Federal oversight or Constitutional oversight over who is allowed to vote in state elections and so forth. So, it becomes almost grotesque to put this forward as a general concern. And the correct way in which to do it is to break it down into smaller questions and say: is this an area in which you think, either as a matter of existing Constitutional law or as a matter of general constitutional theory, that the courts have gone too far? And you know, take one case where that's arguably so: Should the Federal government, or should the Federal courts, the U.S. Supreme Court, have the power to tell states how to organize their prison systems? And I certainly think that the Constitution has gone way too far in an area that Seidman might be in favor of, which is the ability under the so-called 'cruel and unusual punishments' clause to essentially say that it is no longer permissible in the United States to execute somebody if it turns out that he's guilty of child rape. There are all sorts of normative judgments that the Supreme Court makes on capital punishment which bear no relationship to the judgment of 'we the people'. And yet somehow or other I don't know whether or not Seidman thinks it's a bad thing or a good thing. I think that's a case of judicial excess. But on the other hand, allowing a zoning law which confiscates property effectively to pass unchallenged I think is a sign of judicial abnegation. So I just don't see this one-directional situation on any relevant issues, which allows me to say there's too much court or too little court. I take this at a retail level, not at a wholesale level. Russ: The problem I have with it, with the formulation you gave, the Kramer formulation, is that this idea that there is such a thing as the will of the people is a bizarre intellectual concept to me, since most of us don't agree on many things. And any attempt to aggregate our preferences is inherently imperfect. And that aggregation should only take place when it's absolutely necessary or a strong improvement, because most of the time it's a way to redistribute among people. |
| 35:20 | Russ: But let me give Seidman his due and challenge you. He makes a good point, I think, that the Constitution only constrains legislation and behavior infrequently in the modern era, and maybe it would be better to be more honest about its real role in our lives. So there's certain areas--the First Amendment, I think, and that's why he likes it--I'm a fan of it, too. Second Amendment, I think he's also a fan of that also. But we can disagree about which are the good amendments, which are the bad amendments; but I think--am I wrong in saying that there are only a few of them that really matter? That most of the time, whatever Congress wants to do, it does anyway; and we just go along. To quote my--he's actually 15; I misspoke; he got a year older while we were doing the podcast--but my 15-year-old says: Why is marijuana illegal? Why is that Constitutional? Or trans fats in New York City? You name it. What gives the government the right to stop me from eating or consuming what I want to consume? Most people just say: Because it's good law. But we don't really use the Constitution. In a way, Seidman's vague idea that, well, if it's good, if people like it, that's what we should do; we shouldn't be constrained. You think that's true? Guest: Well, in spite--I mean, look. One of the things that people don't know whether they want the courts to intervene or to back off. And the cases that you've given, you would love to have a judicial decision that says it is not within the competence of the state in the exercise of its police power to tell you what you can and cannot eat. What it's supposed to do under its police power is to make sure people don't get killed in street fights and to make sure that poisons aren't circulated throughout the system. But if you have ordinary food and there's an issue of overconsumption, that becomes an individual matter rather than a collective matter to solve. Well, that's an argument that means strong constitutional interventions, not for having weak ones. So, your son is on both sides of the issue. As is everybody else. One of the great things that happened with the Kelo case was that the Supreme Court said that you are taking land for public use--you are going to transfer it from one private party to another. And most people said: This is the most outrageous form of judicial activism. But it was exactly the opposite. It was a situation in which the Court knew that this was not a public use transfer, and nonetheless said it's up to the state to decide whether or not to allow it. And they should always make it for public use because every transfer will have some indirect public benefit. Well, if that's the test and every transfer has the limitation that is de facto read out of the Constitution. So people who get indignant about this, often whenever they don't like a decision, they call it judicial activism, even when they are cases of complete judicial passivity. So again, I'm just going to repeat what I think to be the case, which is that what we need to do is define imparticularities[?]--where courts should intervene and where not. So let me just give you one simple example: What do you do with tax base[?]. Well, I think it would be absolutely crazy for somebody to say: Well, the U.S. Constitution means, a. that the average tax level can never be more than 4% no matter whether you are at war or at times of peace. That would be crazy. Or that the total budget that could be spent for all times could never be more than a billion dollars. There is a $20 provision about jury trials in the Seventh Amendment of the Constitution. But I think it's perfectly sensible for somebody to say: look, under our Constitution if you want to eliminate the kinds of political discretion that can eat you alive, what you have to do is to have a broad tax base and the tax rates have to be flat. And if you did that it would be a complete transformation of modern American politics at the Federal level. Just think of what would happen in the debate about the top 1%. You could no longer have it. You would be in the same position that Illinois and Massachusetts, both ill-governed states, are with respect to this. That's a judicially enforceable limit; it makes a big difference; and it does not trench upon your ability to raise whatever revenues you think you need in order to discharge the important functions of the day. So, that's a classic case in which, on the matter of rate, it seems to me you would want to have complete Congressional control but on the matter of rate structure, you would want very strong Judicial control. That's the same very issue. So to kind of argue that I'm in favor of restraint or I'm in favor of Judicial restraint or Judicial activism becomes idle[?]. You can disaggregate. Figure out how in accordance with general principles of political theory you give people enough discretion to run the government but not so much to run it into the ground. Which is what we are doing today. Look, you know as well as I do, Russ: there is no major tax rate currently in place which has a half-life of more than two years. They all get changed. And they get changed in terms of the intensity, the progressivity, the kinds of taxes we impose or whatever. So, we had a compromise just this past year in which we raised the estate tax up to $5 million and then give a cost of living increase, and now it turns out the President comes back and says: I don't like that; let's go back to $3.5 million dollars and a higher bracket for taxable stuff. So, his attitude is: I conceded on this point in 2013 in the beginning of the year, and now I'm perfectly okay that we can pass a statute so that by 2018 or 2017 it goes back into a position that is radically different from the one that we have. How do people plan against that kind of erratic behavior? Russ: That is a problem. I'd certainly prefer a more stable tax environment, and I'd prefer a flatter tax environment and a broader based tax. And a more transparent tax system where we don't have this weird payroll tax thing, that people think is for their old age, but their other Federal activities get funded out of the income tax when in fact they both get pooled together. There's a lot of problems. |
| 41:02 | Russ: But let me ask you one other followup to this Seidman issue that come up, which I thought was very provocative, which is--I'm not sure how it came up, but it's something I think about a lot--which is that we have this romance about the Court, that members of the Court have these philosophies. We have these people with strict constructionist views, we have people with more progressive views, people with more liberal views in terms of how the Constitution should be interpreted. What do you think of what I would call the 'realistic view', which is the view that I increasingly come to in most areas of human thinking, which is: People have a bunch of biases and ideologies and philosophies, and they do what they want, and then they cook up the reason later. They are not really seeking the truth when they go out to examine a court case. They know what they are going to come to. They just have to find cases that support that view. In what sense do the Justices of the Supreme Court do what we might call 'real jurisprudence,' where they go and find out what the record says, what are the precedents, as opposed to just figuring out where they want to go and write the roadmap as they go along? Guest: Yes. I mean I think it's all too common. It's a very difficult question in general. Because you don't want to say in effect that people who do this are being completely incoherent or inconsistent. Russ: Or hacks. Guest: One of the things that's so interesting about this is if you figure out what the Progressive intellectual agenda was on individual rights, Federalism, separation of powers of the administrative states, their decisions are perfectly coherent with respect to that basic set of principles. And exactly the same thing could be said with respect to us classical liberals. The reason why I scream is that this is not a debate in pure political theory. You've got yourself a text there. I think in fact it does have certain strong commitments to it. And all those commitments were drafted by people who thought about the world in the way in which I do rather than the way in which they do; and yet somehow or other they always manage to win when it comes to the question of what these words mean. And I believe that the descriptive that you've given, that is that people have their political preferences and then what they do is they organize their judicial theory around it, is in fact correct. But I've never been able to get past the simple point that sometimes you are wrong when you do this and sometimes you are right. One of the tests that you always give yourself is to ask whether or not you are creating this sort of the world's perfect constitution, in which no matter what's written there, you always end up with something that is perfectly in accordance with your own beliefs. Russ: What you like. Guest: Yeah. So, you want to find out whether or not you think there is something which is written there which disagrees with something that you clearly favor. And I constantly ask myself that question. And so if we go back to this commerce clause illustration, and the question is whether or not in 1787 there was a protectionist constitution against foreign trade, the answer to that question is unambiguously, yes. Hamilton was a mercantilist; he was a highly influential [?]. He said in effect if you read Federalist Number 11 that one of the reasons that we have this Federal commerce power with respect to foreign commerce is so we can have a united front against foreign states, otherwise we are at the mercy of market forces in the way in which we regulate our own internal economy. I think this is just terrible prose. Bad idea. But I have no doubt of what they did. To give you another illustration, on the question of whether or not there is judicial supremacy: Now, you read closely what the Constitution says about the creation of the Federal Court system, and it's just not in there. You go back and you check the way in which Montesquieu and Locke describe the separation of powers, and the judicial role was to protect individual rights in accordance with the laws that were passed by the congress and enforced by the executive, there was never to veto or to overcept those laws. And yet we certainly have read, since Marbury and Madison, and Martin against Hunter's Lessee, the thing in exactly the opposite direction. And I think it was wrong as a matter of original interpretation. And that gets you to a second problem. Which is: Suppose you've done this wrong and it works. And you've done it for 200 years. So, I'm not the guy who is going to come along and say: You know, Marbury v. Madison is wrong; what we have to do is to overrule it. I think what happens is constitutional law has two things, to deal with this sort of incipient illegitimacy that gets ratified by past use. One is originalism--that is the text, and the various modes of construction. And the other is what I call in my new book the 'prescriptive Constitution'--i.e., if somebody trespasses on your land, he's a wrong-doer, right, Russ? If he does it for 20 years, he's a new owner. That's the doctrine of prescription. And so it is, if you start with a Constitution, somebody does something which is rather gutsy and probably incorrect, and then people acquiesce in it over a long period of time, that becomes the new Constitution. Not in every case, but in many cases. So that--no originalist that I'm aware of wants to go back to the original Constitution on Marbury or on Martin and Hunter's Lessee--that is, dealing with the power of the U.S. Supreme Court to invalidate state or Federal laws. And so you have to be very much aware, and ask the question: What counts as legitimate long use? Plessy v. Ferguson is pretty long decision; it was in power for 58 years and it was struck down by the Supreme Court. I think the long and the short of that is that it was never a decision whose legitimacy was wide-spread accepted, particularly as segregation became more and more ugly. So, now what you have is you even have a worse world. You have to have a prescriptive Constitution with some selective judgment as to which things last and which things don't. And I think you can do that. What I don't think you can do, is do it in an error-free fashion. Russ: Yeah. Well, there's a certain Hayekian aspect to that prescription view. Guest: Absolutely. Russ: It says that stuff that persists must have something good about it. And, as you say, sometimes it doesn't. There may be a reason it persists that isn't because it's good and unchallenged. But it's an interesting place to start. |
| 47:30 | Russ: One more question for my 9th grader: What is the elastic clause? Guest: That's a dangerous kid. Russ: Yeah, I know he is. He's dangerous. That's right. What's the elastic clause, and what is your view of it? What is he asking about? Guest: I think he's asking about the necessary and proper clause. Russ: That's correct. What is that? Guest: Well, if you look at the organization of the Federal Constitution, it's a principle of enumerated powers. And at the end of this thing, at the end of this, it says: And each of the departments of government shall have all of those powers--necessary and proper powers--to carry into execution the aforementioned powers. And so what happens is, it's an enumerated powers doctrine with a twist. And the question is just how big is the twist that we have to add in. And when John Marshall interpreted this provision in a case called McCulloch and Maryland, he said that the words 'necessary and proper' when taken together mean 'appropriate.' And that clearly, as a linguistic matter, lowers the level of scrutiny that can be brought to any particular action of Congress. So, if you think that something is necessary, it means that you can't do without it. And proper, meaning that it manages to accord with all sorts of other prohibitions in the Constitution. Appropriate means a much looser connection. And the proof of the pudding is in the case that he was dealing with, which is the question as to whether or not the Congress had the power to create a national bank. So, if you look at the individual powers what you do is you don't see a bank there. What you see is a power to regulate commerce. And the power to issue credit. And the power to run a mint. And so what Marshall said is, you know, all of those things work a lot better if you can have a national bank. And so therefore it's appropriate to have them, and it's constitutional. There was a big debate earlier on as to whether or not the clause could be read that broadly--Hamilton for it, I think, Madison against. My view is that I think Marshall misread the clause. He was in fact a champion of the strong Federal government. Indeed the best illustration is a young fellow who is about to enter into teaching whose name is Will Ford[?] who wrote this very interesting paper in which he said: Well, is it necessary and proper for the Federal government in the States to be able to condemn land to be able to build to post roads? And you would have thought, how can you build a post road unless you can condemn the land? But the practice seems to have been otherwise. And the rule was that if you have two sovereigns, a state sovereign and a Federal sovereign, what the Federal government had to do was the ask the state to condemn the land and then turn it over to them. So that then gives you an exceedingly narrow reading of this clause, and it's not what you would call an 'elastic' clause. It's a clause which says, for example, if the United States has to find people to live in Washington, D.C., they can essentially give people stipends, even though there's nothing in the Constitution which talks about stipends for housing allowances. And I think at that point, the great battle is you really need to say that, because traditional views of construction would always give you those additional powers anyhow. And so this became a clarification. But when you get to the 1930s, all of a sudden people are saying necessary and proper is the way in which you understand the legitimacy of the administrative states. So, instead of having three branches of government, you can now have what is called the 'fourth branch of government', in addition. It's a huge transformation in the way things work, and this shows you why constitutional law is so perilous. You get something and you don't know what it means; and your son asks you a question; you have no idea of the huge stakes that are involved. And the one thing you could say about all great American Constitutional scholars is they understand how significant the issues that they debate in a way that the public does not. And so with the necessary and proper clause, you get the administrative state. If it turns out that the Commerce Clause allows you to regulate those things which affect interstate commerce even if they are not in interstate commerce, that seems to you like a matter of words; well, you can set prices in the agricultural markets under one way, and you can't set them under the other. So that the battle over the two meanings of the Commerce Clause is a way of expanding Federal power by an order of magnitude at least, if not more. So that's why these things make such a difference. And my view is from the classical liberal Constitution is, if you are trying to figure out under the species of eternity how you put these things together, understanding the recurrent dangers of political order and the recurrent problems associated with factions--the 1787 Constitution is actually more sophisticated than the 1937 Constitution. And part of the reason why we have such a malaise now is there is such a concentration of power in Washington that it's a huge target for every interest group in town to come there and essentially, as you said at the beginning of the hour: You can't create wealth if all you are interested in doing is transferring from one party to another. Russ: Ah--a sigh. A long sigh. |
| 52:35 | Russ: It crosses my mind, as I ask the guests from time to time a variant of this question, that, we get the Constitution we deserve. You and I, we like the Constitution of 1787. Other people like the 1937 one or the 2007. And we don't have many people that agree with us. So, there are these underlying political forces--again, all these ideas about theories of judicial interpretation, that's just window dressing. What's really going on is, the President nominates Supreme Court justices that are politically popular, and basically the ones that are politically popular, because the President wants to be politically popular, and his party wants to be popular, are going to be justices that don't have the "right theory" of the Constitution, but who open the door to laws, legislation, that most people want. And what most people want is a more active Federal government. Guest: What do I think about that? Russ: Yeah, what do you think about that? Guest: Most people want--I think most people want a more active Federal government to advance the particular cause that they champion and a smaller Federal government with respect to all those things which harm them so greatly. And so what happens is you still can get large numbers of people who will quote to you Gerald Ford when he says to you: the government is big enough to give you everything you want; it's big enough to take away everything that you have. And most people straddle that particular kind of an insight. So they don't know which side they are on. But that's why these academic debates, so called, are so absolutely important. Because quite simply, the stakes are enormous. It's very clear that there is no sort of automatic guardian of the public welfare that sits outside of human beings, by divine origin or divine power to structure these things, so what you have to do is to change the climate of opinion in the hopes that once you do that, you'll be able to change the input of the judges on the Court. And remember, it is very common for justices on the U.S. Supreme Court to shift one way or another. Harry Blackmun started out in some sense as a Nixon appointee, and he does the abortion cases because he worked for the Mayo Clinic, and by God, by the time he's done he's a member of the liberal faction. Indeed, if you look at the Supreme Court there are many conservative Presidents who appointed liberal justices. I think I did a rough calculation once that between, say, 1956 and 2005, roughly speaking, what you could say was that each year on average there were three justices appointed to the Supreme Court by conservative presidents who turned out to have deeply liberal sentiments. Russ: My theory of that is they like to go to good parties. So, after you've been in Washington for a while, and most people are not like you, you think: Well, this isn't any fun. Slightly cyncial. Sorry. Guest: Yeah, I know that. But not with Bill Brennan. Eisenhower appointed him because in 1956 he thought he needed to solidify his base in New Jersey. He later described it as the worst political miscalculation in his career. Earl Warren was in fact part of a political deal that if he backed Eisenhower in 1952, he would get the next open seat, and it just happened to be the Chief Justiceship of the United States Supreme Court. Stevens, who is a very distinguished judge, was a buddy of Edward Levy, and that had a huge amount to do with it; and Edward was a progressive Republican and so did it turn out was our friend, Stevens. David Souter was sworn to by Warren Rudman to be a man that would be sound; and it turned out that the first Bush believed him and he got himself 20 years of relatively left of center justice. Russ: Does it ever go the other way? You get somebody who is nominated-- Guest: Political--your party theory--no. It tends to be as people get on the Court, they tend to veer to the left. Russ: And that's consistent with my party theory. Guest: Yes. Sandra Day O'Connor certainly was a more liberal justice towards the end of her term than she was at the beginning. Same thing could be said even of Bill Rehnquist. Somebody like Byron White is a very complicated character, because he was very far to the left on labor issues, on which he was much further to the left than Bill Brennan; but on the other hand he was very conservative on moral kinds of questions, police power, abortion. So he was conservative on some issues. It was not a case in his situation of a transformation. I think that's the way he was when he took office in the early 1960s and he remained that way until he resigned some years later. Now, it's a complicated set of mixtures but there's no question that the age of miscalculation, as one might call it, I think is over now. If you look at the current Supreme Court, every one of the 9 of them is reforming in the [?]. Except possibly for Kennedy. And he was appointed of course 25 years ago. But even he--on the Commerce Clause stuff--everybody said he was the doubtful man, and he came out essentially completely transformed the earlier argument, when he just asked the very innocent question: Does Congress have the power to create commerce in order to regulate it? I mean, you know, that was tough stuff. The theme to end with on the hour is that we all have simple theories which explain some portion, but the closer you look at any of the particular issues, the more complicated the cross-currents turn out to be. So as a descriptive matter, it's very hard to figure out how the capture theory works, under this current Constitution that we have. And as a normative theory it's very difficult to figure out which way the Justices are going to start to come down on the really big cases that shape and define the nation. |
| 58:07 | Russ: Let me close with a rhetorical question I have here written down--it's kind of comical: Is there anything important you have to say about the Constitution I haven't asked you about? It's a rhetorical question--I know the answer is Yes. Guest: Yes. Russ: Why don't you close with some final thoughts, and you might want to mention which direction you think we are going. You and I would like to be closer to 1787. See anything moving us in that direction? Guest: Well, I mean, you know, for example, the single most momentous issues before the Court right now are the gay marriage issue, which is a judicial fabrication designed to create a new set of social rights. Politically I'm very sympathetic with it, given my libertarian organization, but in terms of the structural history of the American Constitution, I'm highly doubtful that you can squeeze this into the Equal Protection clause as it was understood in 1868. The Supreme Court, I predict, will move fairly substantially in the direction of creating constitutional equal protection rights, with respect to gay marriage. And this is originalism on the one hand as against at this point a nascent liberarianism coming out. On guns, I'm a dissenter from the general view of the Second Amendment. I think it's largely a structural position which is intended to protect the Federal government from regulating the way arms are used in the states so as to allow the states to organize their militias, which is done in Article I. But today it's read as a free-standing right and the militia portion of it is just dropped out. I don't think that's originalism in my view, and I think Justice Scalia was wrong, and ironically on originalist grounds; Justice Stevens, who wrote the dissent was probably correct. It's not a particularly well-drafted Amendment, but I think that's the best you could do with respect to reading it. So you get these kinds of cross-currents taking place. As I mentioned to you on cruel and unusual punishments with an 's' [?] I think the Supreme Court is just marching to its own drummer without any Constitution authorization on the one hand and without any popular support on the other, and it's a mistake. And then when you start going down the list of economic stuff, the extent to which we tolerate the extensive economic regulation over various aspects of the economy at the state or the Federal level, I think we are engaged in active self-strangulation of the nation, which are very inconsistent with the protections of property and contract that were built into the original structure on the grounds that when you are worried about excessive concentrations of power, you can't put all of your faith in one kind of remedies so that in a very deep sense, Hamilton was wrong when he said that the structures are the protections for civil rights. And the guys who wanted the Bill of Rights were correct when they said that a certain degree of redundancy is needed. And the great peril that we have today is I think there's too much of a public consensus in favor of this view that government gives us more than it takes from us. And so long as that general attitude exists we are going to have rough sledding. We already know that, even though the stock market hit 15000 today, this has been a very slow and very difficult recovery and we also know that most of the interactions that were taken in the 1930s prolonged rather than lessened the Great Depression, which lasted well into the middle of WWII. And it was because of most of the Roosevelt policies, not the spending policies, but the regulatory policies. And I think the single largest issue in the Constitution that we have to face today is whether or not the judicial system will assert its control over Federal regulation, which I think is ruinous to the organization and against its competitive economic ideals. |
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| 0:33 | Intro. [Recording date: May 8, 2013.] Russ: Given your interests and background, I thought you'd be the ideal person to talk about the recent results that have come out of the Oregon Medicaid Study. And for those of you who haven't heard of that study, it's a very unusual and potentially influential study done by some very high profile health economists. Austin, you've been a very thoughtful commentator on that study as its results have been coming out. I want to start with some background on Medicaid, the program, Federal government program that also works with the states. How does Medicaid work? Guest: Well, let's start one half step before that, which is to say the first thing to know about Medicaid is that it's not Medicare. And I know a lot of people who aren't well versed in the U.S. health system can get confused between the two. So, just really quick, to a first approximation, Medicare is a program for retirees, people 65 and older. It does also cover some people with disabilities and other health conditions. But basically if you remember one thing about Medicare, it's for the elderly population. Medicaid, if you only know one thing about it, the thing you'll know is actually not true; but that thing would be that it's a program for poor people, people you can think of as near or around or below 100% of the Federal poverty level. Which, by the way, I have a 2008 figure in front of me, was about $10,400 for a single individual. So, Medicaid is a program for poor people. However, I think the next thing you should know about Medicaid is that-- Russ: You said that's not true. Guest: Yeah, I'm getting to it. The next thing you'd want to know is you can think of it as really two programs put together. One is that it is a Federally mandated program for people who meet certain conditions in addition to being poor, and these are people who are old, blind, or disabled, pregnant--specific, 'categorically eligible'--specific categories of people. So these people can get on Medicaid if they are both poor and meet one of these categories. And that's not everybody. There are a lot of poor people who are not blind or disabled or pregnant or old. They are just poor. And so the second thing that a Medicaid program can do, and this varies by state, is expand to include those other people who are poor but don't meet one of those categories. And so this will vary by state; and sometimes it involves certain waivers from the Federal government to expand in certain ways; but it's separate from the mandated core of the program. So one mistake people often make is they think: Medicaid; we've got a program for the poor; it's called Medicaid; everyone that's poor is on it; no problem; they are taken care of. Well, that isn't true. In many, many states it's only people who meet certain categories; and this is one of the things that the Affordable Care Act and health reform law is supposed to address. Or was supposed to address. We can get into whether it will. It was designed to include all poor people regardless of whether they are categorically eligible, right now. Russ: So, if you are on Medicaid right now, either because you meet one of the categories or if you are in a state that expands coverage beyond those special categories, you are "merely poor," what are the benefits? What happens to you when you use health care? Does that vary by category, by state? But once you are on Medicaid, what happens to you? Guest: Mostly, your health care is paid for through the state program, and it varies by state what the details would be. There may be some cost-sharing, a few dollars in a co-payment for a drug or a doctor visit. There may be a small premium. And these things can vary by income, so that if you are very, very poor, way down well below the poverty level, maybe you'd have no cost-sharing and no premium. If you are at the poverty level or maybe a little above--some states expand above--maybe you'd have some of those things. But it's basically a health care benefits program, so it would cover hospitalizations and doctor 's visits, preventative care, prescription drugs. What it typically doesn't include though is dental or vision. So you will find many Medicaid beneficiaries or Medicaid enrollees who are getting much of their care paid for but they have horrible problems with oral health, for example--their teeth are just in horrible shape. And that's an issue for them. Russ: So, if I'm a poor single parent and my kid is running a fever and I'm worried that she's got an ear infection, and I'm a Medicaid recipient, what do I do? In my case, I've got health insurance coverage through my employer, and I take my kid to her pediatrician and maybe get a prescription; and that office visit is--I don't know what it is, maybe $20. And I pay a very large premium to have that privilege of a $20 visit; and my employer pays part of that as well. Now, give me that story when I'm a Medicaid recipient. Guest: It's the same story, except, as with many people's plans, there would be a network of doctors and hospitals that would accept the plan; and some may not. And that's true of many people with private coverage as well. So, you could go to one of the providers that accept the coverage and have your care provided there, and largely or entirely taken care of cost wise by the program. Russ: Depending on your state, whether there's a co-pay, the things you talked about before, right? Guest: Yes. So there could be small copays, and that's going to vary by income, by state. So one of the standard lines about Medicaid is: If you've seen one Medicaid program, you've seen one Medicaid program. There are 50 plus D.C., and they are all different in some way. So it's very hard to generalize without basically lying a little bit. And an advantage of that diversity, however, is that it can be studied. Studies have looked at that variation. |
| 8:03 | Russ: So, let's get to the Oregon Study. It's been a great week, week and a half, maybe 2 weeks for empirical economics. We had the Reinhart-Rogoff Study, which we'll be doing something on in a few weeks here. But the Oregon Study has created a firestorm of comments in the news and the blogosphere. So give us the background on that study and what it's trying to understand. Guest: So, this study, there's so many great things to say about this study. But let's just start with how it came about. So, Oregon had closed a part of its Medicaid program that was for people who were just poor. It's got the mandated Federal categories--that arm of Medicaid has got to keep going. But for budgetary reasons they had closed new enrollment into their expansion of Medicaid. This is in the mid 2000s. And then they found, the elected officials decided and found some funding that they thought they could open enrollment to about 10,000 people in 2008. But they did something that to my knowledge no other state has done, or at least is not common, which is they offered enrollment to people on a lottery basis--they opened a lottery. And people could apply to the lottery and put their name on the list. And then they selected some number of people off the list, about 18,000--no, 30,000 off the list out of the 90,000 who applied, to be permitted to enroll. And this was a random selection. And while this was going on, some investigators at Harvard and MIT heard about it, on National Public Radio (NPR), I think. And they said: Oh, wow, this is a randomized trial. They are randomizing people into Medicaid, or they are randomizing them into the privilege or applying for Medicaid. Russ: So, the 90,000 who applied, they didn't take the 30,000 sickest or the 30,000 richest or poorest. Guest: No. Russ: They just took a random 30,000. Guest: It was random. Correct. And they said: Okay, out of the list of 90,000, you 30,000 can apply. Now not all of those 30,000 were, as it turned out, by the time they could apply, eligible. Some of them lived out of state; some of them, their income was too high at the time of application; or for other reasons they weren't eligible. Some just chose not to apply, maybe because they found other insurance, or for some reason. Actually, about 18,000 who were eligible to apply actually did. And then ultimately when you get down to the study we're going to talk about where they did some follow-up surveying and so forth, the study actually only has about 6,000 in the control group--those are people that are randomized that couldn't apply; and then 6,000 people in the randomized to-be-able-to-apply group, of whom only about 25% actually enrolled in Medicaid. So, it's a little bit confusing. Out of all these numbers, what's at the end of the day when you look all at the data collection, you've got 6000 people in a control group, 6000 people in, call it a 'treatment group', but I want to say what 'treatment' means in this context is were randomized to be permitted to apply for Medicaid. Russ: But how many of them enrolled in the program? Guest: Right, so then you have the enrollment group, which is a subset of that treatment group, and that's 25% of the treatment group, or about 1500 people. So that's what the latest study is looking at. Those are the numbers, the basic underlying numbers, on what they have. Russ: And a little methodology here: So, we've got the control group and we've got people who are enrolled in Medicaid. How do we, the students of this program, the investigators, monitor or assess their data, health outcomes, demographic variables, etc.? How many times? What's the format? How do we learn about them in these two experiences? Guest: There's a number of data sources. So, first you have information that was provided just in the application process. That's very basic information. I'm not quite sure what it all was, but age, things like that. Russ: Sex. Guest: Yeah, just very basic. And then the investigators--they had a lot of cooperation from the state of Oregon, where this took place, and they got administrative data. So, these are things from the Oregon Medicaid system itself. When people enrolled they provided a lot more information and they could look back over time to see if these people had enrolled in the past and get the whole history of involvement with the Medicaid program for the sample they had. Russ: And they know when they visited a doctor, etc. Guest: Yeah. I don't believe they had access to all those kinds of medical records, but what they did have hospital records. I'm not sure they had outpatient records. I didn't see that mentioned. But they did have hospital system records. Hospital discharge data. And they also pulled in, for reasons that are kind of a detail, credit data. Actually, that's not a detail. What is a detail is they got some kind of food stamp and cash/welfare system data from the state as well. Russ: For the non-enrollees, the control group, how did they know stuff about them? Those 6000--so there's 6000 people who didn't win the lottery; and now they get contacted presumably by some health economists or the state of Oregon saying: oh, you've been chosen to participate in this survey. How did we get information about them? Guest: Right. So all the things I just mentioned are administrative data. And they have that on everyone. They had all that stuff I just mentioned on everyone. Then they went to both the treatments and control groups with mail and phone surveys. The mail and phone surveys--this group published a paper last year and this was done prior to that, and I don't remember the date but let's just say it was in 2009, 2010 or something like that. So they surveyed everyone by mail and phone and they got a 50% response rate in that survey. Russ: Which is very high. Guest: Yes. Russ: For a mail survey it's ridiculously high. Did they follow up by phone? Guest: They followed up by phone. Yes. And this is where they got additional data on health care use and cost and financial strain, health status and demographics; but this is all self-reported. So, they weren't going to these people's doctors and asking them; they were going to people themselves and saying: Have you visited the doctor in the last number of months, or year? What happened there? It's all structured, but this is how it's done. Russ: But they didn't show up with a blood pressure cuff and measure things directly from them. Guest: Not in the mail and phone survey. Russ: Correct. Keep going. Guest: So, the data I just talked about, the administrative data and the mail and phone survey data, that was all available a year or more ago; and this group published a paper a year or more ago. The most recent paper includes that plus in-person interviews. And the in-person interviews was where they collected biometric data. So, this was blood pressure--they actually measured it. Blood samples, so they could get cholesterol levels, blood sugar levels. So this is a lot of really granular detail on the actual health of the individuals. I don't know quite how they did it, if they did it with nurses and so on, but it's almost like having a doctor visit, in a way. They just measured some basic things. Russ: Reminds me of the National Football League (NFL) Combine--they did a 40-yard dash, and then an IQ test. So, they met them face to face; they gathered more data. And this is ongoing. Is that correct? So this experiment is still going? Or is it over now? Guest: The data collection is over because I believe the state has subsequently expanded the program so the lottery is not necessary; they are not randomizing any more and everybody who wants in can get in. Russ: Did the economists protest? Hey, you're ruining our study. Come on. Guest: Yeah, I know, it's true. Russ: That human subject regulation is a bummer, isn't it. Guest: What is forthcoming is there was some more data collection and analysis beyond what is reported in the latest paper. That's ongoing, and they expect to have more results. One thing they could do, I believe they are going to do but I wouldn't swear by it, is: you can monitor, for example, mortality down the road because you can get public death records. And so even though these people were once randomized and now the study is over, you can look 3, 4, 5 years down the road and see if a couple of years' experience on Medicaid, versus not made a difference on things like mortality. That could be done. Whether they are going to do that precisely, I'm not sure. |
| 18:10 | Russ: So, why has this recent set of results that has come out in the last few weeks, why have they been so controversial? What were the findings? First, rather than talking about why they are controversial, why don't you summarize what the most recent study found, the most recent study of these data. Guest: Okay. So, there were a number of findings that were statistically significant, and I think, to my knowledge are not controversial. And these are areas--I'll just give you the broad categories and we can dig into them. So, they did a battery of analysis on financial protection, how much does Medicaid protect you from high bills and devastating high costs of health care and so forth? They have a battery of results on access and prevention, so: How much easier was it for you to see a doctor and get preventative screening and so forth? They have some results on health outcomes, both mental and some physical health outcomes that were statistically significant. And they have results on cost, in this report. And so, we can go into some details on those. Those are not generally controversial. There's then a set of results on some additional[?] physical health outcomes, physical health measures that were not statistically significant. And it's those that are really the subject of debate. Russ: And summarize those. Guest: So, those are things like the effect of Medicaid on blood pressure, changes in blood pressure, cholesterol level, blood sugar control--which is related to diabetes. And medications for these things. And so when you look at all these things--and they are all, several of them are measured in a few different ways--but when you look at the table in the paper there's maybe a dozen or so results that are staring at you, all about physical health. In one table. And none of them are statistically significant. So it appears as if the study is saying that Medicaid is not able to have an effect, across all of these health measures. And that--the discussion over whether that's what the study is saying--is what the debate is about. Russ: So, we'll talk about that and then we'll talk about why it matters. But let's first talk about these results. I've argued, as have many people, that we ought to be more worried about health care than health insurance. Obviously, health insurance has certain aspects to it that are distinct from health care. But they are positive. Like comfort and not fearing financial distress. But it's also clear that health care insurance doesn't keep you literally healthy. There are other ways to get healthy; there are a lot of factors that aren't related to medical care and the use of the medical system--nutrition, genetics, stress, lifestyle, etc. So this is a big, messy area. But my general bias, which I'll get on the table, has always been that I really don't want to expand the current system that we have, that allows people to spend other people's money, which then pushes up the use of medical care often without value and makes the whole system more expensive for everybody. Now obviously there are a lot of pieces to that that I know you don't agree with. But I want to start with the point that it's not so shocking to me--even though, I'm not a big fan of Medicaid--it's not surprising to me that in a 2-year study that it didn't find very much of an effect. That's not the claim I would think of the value of having health insurance, that over 2 years their blood pressure is going to drop, your blood sugar level is going to drop if you are close to diabetes or have diabetes. Are these really the measures that we want to judge the value or lack of value of federal and state subsidy to poor people? Guest: Well, um, should we use these measures? Or are you asking, are people, did some people think? Russ: Both. Guest: So, I'll take the second one first. I think that there's a great diversity of claims about this study, and in fact, though I haven't looked back, myself, carefully, I probably suggested a year ago that the proof was in the pudding of whether health insurance affected health in results just like these. In other words, I was looking toward this study to put to rest this discussion whether health insurance facilitated an enhancement of health or not. Now, when I said such a thing, I was not aware--I could have been aware but I wasn't aware--of the precise measures they were going to look at. I was certainly not aware of what some of the baseline rates I think were and how much power the study had to detect changes if there were any. And so--now seeing the results and looking at the actual numbers that they had, I'm actually not surprised that they weren't able to show an impact. Now, are these the right things to look at? No, I don't think so. I'd say some of them are and some of them aren't. But I'm not a physician, so it's a little hard for me to judge. Look at diabetes in particular. We know clinically, from clinical evidence, that taking certain medications if you have high blood sugar or diabetes really affects those things. I mean, it really moves the needle on your blood sugar, in terms of blood sugar control. And if health insurance facilitates greater access to those medications, and people follow through, then you ought to see a result. As for blood pressure and other things, maybe you can make the same argument. That's how I think the basic causal chain would go. |
| 24:57 | Russ: And what's the bottom line for you of these latest findings? Does it change any of your priors? What does it do? Guest: It changed my prior on what I thought this study was designed to detect. So, I spent the better part of this week digging into details on the design of this study and how it was powered or how many individuals were actually involved, and what that meant for what it could measure. Russ: Talk about what you mean by 'powered.' Because that's a statistical term that most people aren't familiar with. Guest: Right. So, 'power' is the, strictly speaking, it's the probability that--the way it works is, you are supposed to say, before you do a study: we're going to do a study of, you know, insurance--of course, not insurance--and we hypothesize in advance that insurance will, let's say, move someone's blood sugar from, let's say, whatever it is, the baseline, to some lower value. If it's elevated, it will bring it down. Insurance will have that effect; it will act through people who obviously have high blood sugar and take drugs; not everybody is like that, but on average it will have this effect. And you say what that effect is in advance. And you design your study so that it has enough sample to capture that effect. If you design a study with three people and you are expecting everybody to be cured from cancer, you are just not going to find that. Russ: Because that's too big an effect to expect likely. Guest: Too big an effect. Combination--too big an effect and too small sample. If you instead say, I have three people with certain-stage cancer and the intervention is I'm going to give them a certain drug, a certain radiation treatment, and one out of the three will be cancer free in 2 years, say--a 30% response rate. Well, maybe that's reasonable to expect. But you wouldn't expect to be able to measure it with very much precision with a sample of three people. Russ: You want 3000, or 300. Guest: Yeah. That's exactly right. So, what is that number? You can calculate that number in advance. It's actually very simple. You can do it with online tools or you can do it in physical software. And this is a standard calculation for any application for any application to NIH, National Institute of Health, or any study within the Veteran's Administration (VA) that I do. You have to demonstrate that you have "power" to detect the hypothesized size that you think is reasonable. So you suggest that this intervention will have such and such an effect; then you do a calculation saying: If it has that effect, we have enough sample, we are going to do enough data collection, or our data base is already big enough, such that conditional that it has that effect, we will be able to distinguish that from no effect. We have the error margin small enough. Russ: So, just to take an everyday example for people who aren't used to these arguments. Let's suppose my hypothesis is that men are taller than women. Which most of us are pretty sure is a true statement. So, let's say we want to show that. If we take a sample of 6 people, it could be that the 3 men you choose just happen to be short men and the 3 women you choose just happen to be tall women, and it wouldn't be a very reliable finding if you found that the women were taller. But as you go to 6000 men and women, the odds get larger that the finding that men are taller than women is more reliable. I gave a bad example at first--I should have said if you chose tall men and short women, you wouldn't know if that was true by chance. It could be that you just chose tall men and short women. But if you chose 6000, 3000 men and 3000 women, the odds that that's true by chance, your finding gets a lot less likely. So, one way to talk about--you've written that this study was "underpowered." Another way to say that is the investigators presumed that the effects would be larger than they turned out to be. Is that correct? Guest: Uh, they could have done that. I'm not sure that's exactly what happened. They could have either presumed very large effects. The problem with that hypothesis is that the effect sizes for which they are powered are enormous. I did actually do this calculation. Russ: What does that mean? Guest: Well, for example, one that I did was, what this study found, the point estimate for the proportion of individuals whose blood sugar dropped below a value--there's a value of blood sugar above which you are considered diabetic or near-diabetic. And they found that the proportion of people on Medicaid who had a blood sugar below that level, so they dropped from a diabetic or pre-diabetic level, down, was 20%. So, this is the point estimate. So, 20% of the people--fewer people in the Medicaid group had elevated blood sugar than in the control group. That's the point estimate. but, big error margin. That's the point estimate. 20%. I computed that, if that number had been 4 times larger, so 80%, if it had an 80% effect, then they would have been powered to have distinguished that from happening by random chance. Russ: It would have been statistically significant--it could have been statistically significant. Guest: Right. They would have been powered for that. But an 80% effect rate from just giving someone insurance--I don't think the investigators were thinking in advance: We expect 80%. What I think is much more likely--and much more likely in economics: You know, economists don't generally do power calculations. In fact, before a year or two ago, I had never done one. Because what's more typical is for an economist to say: We're going to study this issue; we have some data, which is fixed in size. It's the size of the data base; we don't do surveys, generally. We're stuck with it. You know, in macro--there's only so many countries and so many years. I'm not going to suddenly cook up 10,000 more country-year combinations. So, I'm just going to go in and see what I can find. And some of it will be statistically significant, because it has a big effect; and some of it won't be. That's just end of story. We don't do a power calculation because we can't change the effect size. That's just "nature." Or the system. We can't change that. And in economics if you can't change the n, the size of your sample, there's no point in a power calculation. Except one point of the power calculation to do is: Is this even worth investigating in the first place? Am I likely to come up with informative results? Are my results of any value? You could know that in advance, if you thought you had a reasonable guess at an effect size. Or at least a bound on it. It's just hypothesis. What I think is more likely in this circumstance is: Investigators had a great opportunity. It's a great study that did a lot of good things, the design is fantastic; we could go into some of those issues, but I think we could. And they actually pre-specified all their analysis. So, this wasn't a fishing expedition. They put online: Here's what we are going to do. Russ: Yeah. Guest: Exceptionally impressive. And then they just went out and did it. If they did a power calculation in advance, I've never seen it. I don't think it exists anywhere publicly. And chances are, I'm not sure I would have. |
| 33:03 | Russ: But the bottom line is that on a number of predetermined, important health measures--and I would actually call them proxies, and maybe we'll come back to that later, but it's not actual health. It's things, like you said, biometric measures. They are things like blood pressure, blood sugar, etc.--they didn't find any effect. Now, they did find some effects, though. So, why don't you talk about what they found that was significant. Guest: Well, the headline big effect was financial protection. So, out of pocket medical expenditures that were above 30% of income--so, this is their definition of a 'catastrophic expenditure'--that was basically dropped to zero. I think it dropped to 80%, from a baseline rate of 5.5% down to 4 point something percent. So, Medicaid virtually wiped out the chance that, you know, medical expenses are going to clobber you. That's completely predictable, given what Medicaid is or health insurance in general. The likelihood of medical debt came down by 20%, and the proportion of people borrowing money or not paying off medical bills was cut in half. So, a lot of financial protection. That's actually to be expected and those are reasonable. Big increases in access; and this kind of relates to financial protection. You know, if you don't have to pay for care and it's "someone else's money"--it is--you are going to much more readily go in and get preventative screening. So there are big reductions--or big increases, I'm sorry--in women getting Pap smears (Papanicolaou tests) and mammography. A 20% increase in women getting "all-needed care." I'm not sure if that's self-reported or if they defined what they meant by 'all-needed care.' But, big increases in access. And then there's some significant increases in health outcomes. The big one there is depression diagnosis. So, right after the lottery, they could look at who was diagnosed for depression. And they found that there was an increase in probability of depression diagnosis right after the lottery. But over time, the people on--so, why would there be an increase in depression diagnosis? This is just an access thing, so more people are going to the doctor and they are getting diagnosed. There's higher rates of diagnosis. One hopes, but I don't know, whether all those additional depression diagnoses are real--these people are actually depressed--or whether it's just an increase in diagnosis. Russ: Yeah, we've spent some time on this program, as I think you know, talking about the challenge of correctly diagnosing depression; the interests of the pharmaceutical industry, and encouraging diagnosing of depression, etc. So that's a tricky thing. But they did find an increase in diagnosis. And then a decrease over time in people screened for diagnosis. So the increase in people diagnosed, and then with their interviews they could do a screening for diagnosis later, through a series of questions that were validated for this purpose, and found that the screening-positive rate came down 30%. So, people were diagnosed with depression and then it came down by 30%, whether they were actually by this measure depressed later on. So this is an improvement in depression from, you know, post-lottery diagnosis rates. Russ: Which we don't know exactly what the source of that is. But it appears to be, it's correlated with being in the Medicaid group. So it could be related. Guest: Right. The design here--I think the investigators would be comfortable saying it's a causal effect based on the design. But we could get into whether you are comfortable with using causal language. But just to finish out the mental health thing, they got a statistically significant improvement in self-reported mental health, and in the proportion of people saying their health was good or better than the prior year. And we talked about diabetes. Well, there was an increase in probability of diabetes diagnosis and medication, and those were both statistically significant. And you might wonder about cost of all this. There was an increase in cost, expenditure to the state, of $1200. This isn't all expenses. Increase in cost overall. So, people who were not enrolled in Medicaid, they were just spending out of pocket. But the increase in overall cost of care due to Medicaid from all sources is $1200. Russ: Per person? Guest: Yes, per year. Russ: And that's from their increased use of mammography and all their other tests, etc., that they had access to, presumably. Guest: Right. |
| 38:20 | Russ: So, let me play the skeptic here. A while back, and you'll tell me when, there was a famous study that was vaguely like this, not exactly like this. 'Vaguely' is not the right word. But it was designed to see how people respond to health insurance. It was done by the RAND Corporation, and it was shocking and controversial. And remains controversial. They found that people who faced--correct me if I'm wrong--lower prices used more medical care. As economics would predict. But their health outcomes were basically the same. People did not get the benefit of those programs. You could say it's not surprising that people who win the lottery get in a better mood eventually, that they have fewer financial problems. That's not a very good test of Medicare's [Medicaid's?] efficacy. It's a result of giving people more free stuff. It means they are going to have fewer financial problems. In other words, maybe than expanding Medicaid, what we ought to be doing is giving people money. So, as a skeptic--which I am--the RAND study, and how this study--there have been other studies, Levy and Meltzer, 2008; Kronick in 2009--that seemed to suggest that health insurance does not have much of an impact on health. Maybe it makes you feel better, maybe it helps you sleep better at night. That's not that is not important, but insurance is a relatively expensive way to get those outcomes. And so the question is, as someone--and you are not alone; there are a lot of people who believe that we should be expanding health insurance and availability in the United States, and it's either through public programs like Medicaid or other ways we could do it--where's the evidence? Guest: So, I'm going to disagree with one nuance in what you said, and then agree with a lot of it, and then focus in on where the action is. So, the disagreement--and this is all going on when this latest study came out in the last week--the disagreement I have with what you said, or maybe with what you implied--you may not have quite said it, but if you said it I'll disagree with it--I'll put the words in your mouth-- Russ: It's fine. Guest: The disagreement would be: This latest study, because of the power issues, basically the low sample size combined with the low reasonable expected effect rate, effectiveness basically of Medicaid, is uninformative on key physical health measures. It's just, the error bars are just too wide. Now, that doesn't mean it's possible that Medicaid had zero effect, that it's possible. I think what it more likely means--well, it means what I said. It means it's uninformative. But I think what's more likely true, Medicaid may have a small positive effect and this study could not detect it. However, you are correct to point out that there's lots of other work we can look at. And, including the RAND Health Insurance Study; including the Levy-Meltzer study. And others. And I think when you look really carefully at those--and in fact the publications bear this out, and what the authors say is that, you know, where the action is--for most people, health insurance doesn't do much. Because most people are healthy. Health insurance doesn't do much for your health. But it does a lot for spending; it does a lot for access; it does a lot for financial wellbeing and peace of mind. So, all of those things--I agree with that. That's the part I agree with. Or people who happen to be sick. Or poor. And/or poor. Both, really. Public assistance for taking care of their health care does have an impact. The RAND study showed; Levy and Meltzer point that out. And so that's where the action is. Now, I think you are right to say that there are other ways to help those people. And the way Medicaid is currently configured may not be the right approach. And I think that's a completely valid discussion. But just on the evidence alone, I think the evidence is consistent with the idea that there are people for whom health care is helpful. But that's not really most people when they are healthy. And in our current system, health insurance does facilitate access to that help. |
| 43:03 | Russ: Let me just add one more troubling piece to this, which is: You hear a lot about the value of preventive care. And I had Eric Topol on this program a few episodes back. And he made a shocking observation to me--this relates to this study, which is the Oregon Study--which is that the statin drugs which reduce cholesterol, they don't reduce it for most people. And for the ones that have reduced cholesterol, it's not very well correlated with better health care, better health outcomes. So, we have all these drugs that reduce cholesterol, but they don't, it's not clear that they reduce your risk of a heart attack, even though cholesterol has something to do with a heart attack. Which is weird. But that's the reality. And so, to me--and I'm going to put this issue back on my foot in a minute, because I'll be done picking on you in a second, but for me, the challenge is: Shouldn't we just be taking care of catastrophic health care risks rather than pushing the country toward what to me is similar to what we do with Social Security, which I think is nuts, which is: Everybody gets it. Rich and poor, we all get it. We all contribute, well get it back. And that allows us to do some subtle redistribution within donors, payers, and recipients. And similarly, we have a bunch of people who have good health, and bad health; we have rich people and poor people. Everybody's going to get free health care. If you use the system without any free worries at all, even the most of us, most of the time, don't have that much value from that privilege. And we depend a lot on it, because we've lowered the cost artificially, the price artificially, and encouraged usage as a result. Which pushes up the cost. So, what's the--many of the people who designed and executed this study are major proponents of the Affordable Care Act. Including Jonathan Gruber of MIT. Where's the evidence for their viewpoint, given what we've found so far? Guest: Um, well, apart from Jonathan Gruber, I'm not actually sure what the position on the Affordable Care Act is for everyone on the study. He was involved, but he wasn't the principle investigator. Russ: Fair enough. Guest: And this study--I in large part agree with what you said about providing public benefits for everybody, rich, poor, sick, healthy, so forth. But when you have finite resources--even accepting, which you may not, but even accepting that you are going to public funds for support, those funds are finite. Society is only willing to bear so much. Witness the debate over tax rates, so forth. And given those constraints, it's perfectly reasonable to say: Well, we're not going to provide free health care to millionaires; but everybody gets Medicare. Russ: Not just that. We are not going to give my wife, and myself, an incredibly low price for our pregnancies and deliveries, which, we had some control over, strangely enough. Guest: Yes. Russ: It's not catastrophic; it's not unexpected. It's not insurance. I go to the doctor every year, every two years, depending on my schedule and whether I like it. That's a checkup. That shouldn't be part of insurance. Guest: Right. So there's a lot one can debate. There's a lot of things bound up in all this and that would take maybe 2 more hours, if not 1. But where I was kind of headed, was, so, we spend a lot on Medicare, and that's where everybody wants to reach a certain age regardless of their income and assets, so there is some means testing of the premium. But you know, nevertheless. We also spend a lot on, or don't collect taxes on, employer-sponsored health insurance. Russ: Which is nuts. Guest: And there it's even more perverse. It's not only that rich and poor people alike are getting benefits. Rich people are getting a bigger benefit. Russ: Correct. Because they have higher marginal tax rates. Guest: Correct. Very strange. It's hard to imagine why you would design it this way. Now, what we are spending out of public funds on Medicare per person is about on the order of $10,000 per person. And what we are forgoing in tax collection on employer-sponsored insurance is about $5000 on average for each insured worker in a family. That includes family plans, too. Now, what this study, and what really the debate is about in states right now, is about poor people. I mean, legitimately poor people. Objectively poor people. It's not a mix of poor and rich. It is a mix of healthy and unhealthy. But this is a mix of poor people. And the cost, under the Medicaid program of providing a benefit to them that, well, we can argue is it like employer-sponsored health insurance, is it like Medicare? That could be a debate; maybe it's worse, maybe it's better, maybe it's the same; but it's akin to it. Maybe it's basic, apart from dental and vision perhaps, but it's pretty fundamental, pretty standard benefit package. The cost of that, for a variety of reasons, is extremely low--$3000, $4000 per person. And these are all poor people. And the debate right now is whether states right now, well, with help from the Federal government, expand the programs to cover everybody under that so that all poor people have at least this level of protection. And, you know, is this study informative on that question? Um, well, I think it's more informative on the question of: Do poor people benefit from assistance? And in this case the assistance was a specifically designed Medicaid program in Portland. In and around Portland. I didn't mention that. All the in-person stuff, so all the data in this study was in and around Portland. Even though the expansion was state-wide, this focus, this study was focused on the Portland area. Anyway, it was designed around that program. But states have some flexibility to design different varieties of Medicaid. They may not have as much flexibility as you or I would like. But broadly I think it does address the question whether poor people benefit from some assistance. And I think it's clear they do. And that's what you'd expect. Is the nature of that benefit worth the cost? You know, that's a point one can debate. Could that benefit be reconfigured or delivered in a different way that's more efficient or helpful? No doubt it could be. |
| 50:35 | Russ: So, let me put the issue on my foot--I don't know what the right metaphor is, but some of this discussion--and I'm not talking about our discussion; I'm talking about the general discussion on the blogosphere of the reactions to this. There's a lot of jumping up and down by one side; and a lot of 'oh, it's no big deal,' on the other's. So, the people, like me--and this is not my reaction, as I've made clear, but a lot of people who don't like the Affordable Care Act or who don't like Medicaid generally, they've been jumping up and down saying: See, this proves we've been right all along; Medicare [Medicaid?] is a waste of money. The people who like the Affordable Care Act, like Medicaid, want to see it expanded, say: Oh, it's only two years, it's underpowered, it's one survey. It reminds me a little bit of the recent empirical work that's come out about the minimum wage that says it doesn't have any effect: doesn't reduce employment, doesn't hurt low-wage, low-skilled workers, it just gives them a nice raise. And I have to say, when I see that literature my first thought is to explain it away. Because I believe that there is an incentive effect to employers of making workers more expensive. So I say things like: Well, you know, when you have a relatively low minimum wage, as we do, where only a few people are affected by it, it's not surprising that when you raise it by a relatively small amount it's still only affecting a small number. It's going to be very hard to tease out the effects because most people simply aren't affected by the law. Obviously if the minimum wage goes from $7.25 to $9.15, it's not going to affect your salary or my salary or my employment or your employment. And so, an econometric study that tries to evaluate the impact will often, I would say, might not find any impact. Of course, all the studies that found a big impact, which is what the literature was--my side, those around, said: See, see; it has a big impact. And when these new studies come out, they say: Well, you know, it's a small population, it's a phone survey, the methodology is wrong. So I just want to reflect on the fact that it's very easy to over-exaggerate the significance--I'm using that in the non-statistical sense of the word, the importance--of any particular finding. Because of confirmation bias. So, I'm just curious if you want to just react to that, in terms of the people you know and have talked to, the people you blog with. Is there some hunkering down? And we saw the same thing with Reinhart and Rogoff. The people who have been talking about debt: Oh, well, the result still holds; those who are worried about debt say the result still holds. People on the other side said: See, we told you all along it's a sham; we don't have to worry about debt. So, just reflect on that. Guest: Well, I think that's right. I think there is some hunkering down and shifting of emphasis, just focusing on the statistically significant findings and sort of explaining away those that aren't. I've seen that. I don't like it. I don't like to see that. That's not how I've approached it. The way I approach things is, one study is not definitive; you need to look at a body of work. And one would hope that body of work, using different methods, different data, different people--certainly different people, hopefully people of different ideological persuasions if possible--if they all are kind of pointing in the same direction, maybe not all but a preponderance in the same direction--it really increases you confidence that that's the right way to think about it. Having said that, I think you also have to weigh the methodological strengths of each study. So, in this case, it's a randomized trial, randomized control trial. Albeit with some leakage and crossover and so forth that they address with a statistical approach, quite reasonable and accepted. And I think for that reason, this study carries a lot of weight. However, one of the limitations of this study--and this is something that I was a little bit distressed to see; very few people recognized, on either side of the debate--one of the limitations is: It just didn't have enough sample for certain questions. Had enough for some; not for others. And, you know, I don't think anybody, no rational person, would want to base a decision on under-sampling. You get some examples earlier. If you are going to try to assess something, you want to make sure you sample enough of the world to be confident that you are not just reacting to noise. So on some questions here, what is reported is not that much better than noise. Now, it is better than noise because they had some sample. But the error bars are really big. And so, and this is something you can just compute--how big a sample would they have needed, and therefore this one is underpowered and that one isn't; and it's objective. You can do that on every study. You can go back to every study and do that if you want. And so I was a little bit, I've been a little bit uncomfortable with some of the responses to this, either accepting the results that aren't statistically significant as informative--accepting them as informative or more informative than I think they are. I think some of them are relatively uninformative. |
| 56:27 | Russ: So, here's how we could imagine life working. It doesn't work this way, right? But we could imagine the following. And again, I'm picking on you a little bit; but I could easily pick on myself. Guest: I've been much more picked on. Russ: Yeah, it's mild. So, here's the world we could live in. So, you said the sample is underpowered. Again, even thought I like--this result confirms some of my biases, I think 2 years is a very short time. I know some people are confident it would be a long enough time. But let's suppose I said to you: Okay, we are going to expand the time span of this study; we are going to run it for 10 years, not 2. Maybe 30 years. Let's run it for 30 years. Let's quadruple or sextuple the sample size, make it as big as you want. Make it 50,000. We've got 50,000 people here, 100,000 people, in each group. Run it for 20 years. And we'll make a deal. Along the lines of former EconTalk guests Robin Hanson or Bryan Caplan--they are both big on bets. And we'll say: Look, if it comes out that even then it doesn't have any effect, would you change your mind? Guest: Oh, yes, I would. Russ: Well, you say you would. And again, to put the shoe back on my foot: Well, if you raise the minimum wage to $25 an hour, well then you'd find an effect; and I have to be honest with myself. When they raised it from $5-something to $7, I think it was $5.15 to $7-and-a-quarter, I would have thought there would be a big effect. Some people claim there is. I think it's pretty hard to tease out of the data. So, the question I think for most of us, when we get these kinds of results that don't confirm our priors, you usually find a way to say: Yeah, I think the methodology; looking at the wrong measures; they didn't do this or that right. It's very hard to find a definitive study. It's not the way the world is. Guest: Well, I don't know how many--I think you are right. And probably everybody, almost everybody says they are not biased. Russ: Yeah, they do say that. I like to admit; it's one of my thrills in life, admitting I'm biased. Guest: I will admit, and this has happened to me: I actually like it when what I thought was true is overturned by some evidence that I'm convinced of. I actually really like that. I would have been more pleased to have this study come out and say: Well, we had the power to detect minuscule improvements and we couldn't even find that; look at this error bar. Russ: But you're unusual, perhaps. Guest: Well, a number of people reacted that way. If you just look around in the early, first few days after this study came out, a number of people said: Okay, we're just basically willing to agree that maybe Medicaid doesn't have a big effect on these health measures or on some basic health measures that we thought it would; but look at the financial benefits, and look at the access, and look at mental health. The mental health result, that is really--well, provided you believe what it's saying, and many people do, it's really big. Even if half of it is true. It's a big result. There's a lot of well-being there. In fact, in a prior paper, a year ago, the authors estimated--they did some back of the envelope calculation using some other work--that the improvement in mental well-being, if you wanted to get that level of improvement from an income enhancement alone, you'd have to double income. There's a big effect. Russ: The only problem with that result is it suggests that, for people who are switching jobs and are going to double their salary, they would still take the job if the employer said: Hey, we'll give you free access to Medicaid. But I'm being facetious. Obviously, if that's a real effect, that's quite extraordinary. There is the question of whether there are other ways to achieve it. But that statement about doubling incomes suggests it would be very expensive to achieve it in other ways. We'd have to check if that's reliable; I don't know. Guest: Oh, sure, I'm not saying we should base policy on that alone. But it's just a way of interpreting the result. In any case, as it turns out, I just don't think this study is as informative as some people think on certain measures. I did this power calculation--it's on my blog--in fact, I have two posts about it; and I was really worried I did it wrong. Because I don't do power calculations very often; and it can be tricky, getting the statistics right and so forth. And so I did it, and what I calculated was-- Russ: I read the posts; you are really cautious. Very cautious. Guest: Well, the result was surprising for me. It said the sample would have had to be 3.5-5 times bigger. And I'm looking at it saying: How can that be? Five times bigger--that's a really strong statement about how underpowered this was. And so I calculated a couple of different ways. I went online to get a different tool so that--maybe I was using data incorrectly. And I had some biostat people look at it. And they all checked off. You know, they do this like for a living. And another professor I found on Twitter had done his own calculation; he said that it was right. And another guy--this is a great thing about blogging--another fellow in the comments--I didn't just do this by formula, I just plugged it into, you know, these online calculators. This other guy said: Here are the formulas. And I just worked through the math, and I'm getting a different result; and we went back and forth and figured out why he was actually using the formulas to calculate something different than I was; and so we worked it all out. The point is, it is really a valid, objective statement that it was underpowered on these questions. I was surprised by that. I didn't want to believe it myself. But it's just what it is. Russ: And when I express my skepticism about our ability to deal with bias, I don't want to suggest that people can never confront things honestly. Obviously, we do sometimes face evidence that forces us to change our mind, or sometimes when we are skeptical about the importance of a result, we should be. Maybe it's not informative. And of course, again, for those of you who haven't been following this, you might [?] start to notice it in the paper and in the blogosphere, it's going to be an issue that continues to get discussed. |
| 1:03:11 | Russ: I want to close with some factual stuff, because I don't know. What does the Affordable Care Act have to say about Medicaid? Because I know that's going to interact with these findings. People are going to be yelling about them in the next election and elsewhere. So, what does the Affordable Care Act encourage or require at the state level to do? Guest: I'm really glad you are coming around to this, because this is the key question. And do you mind if I just take a minute to do the history on this? Russ: No, go ahead. Guest: So, the designers of the law, and as it was passed, the whole idea was every state was mandated to expand Medicaid up to 138% of the poverty level. You'll see 133% written, but there's a 5% disregard, so it's effectively 138% of the poverty level. And every state had to offer Medicaid to everyone with that income or below. And then, this was debated in the Courts as possibly too coercive. So, there was a claim by some states that this coerced states into doing things they don't want to do, and the coercion here was that if states didn't make this extension, the Federal government could withhold all funding for all Medicaid, even the existing part of the program. So, either a state does this extension or they have to wipe out their Medicaid program, was basically the stick behind this. And if that's the deal, there's probably no state that going to walk away from the extension. It's very coercive. Not only would it affect a lot of people in the state, but it would devastate the health system. There's a lot of money flowing to hospitals and doctors, and a state legislature is not going to walk away from that. So, this went all the way to the Supreme Court; and the Supreme Court came out with a ruling last summer that said: Well, everything's fine--you know, they rule about a lot of things about the Affordable Care Act, including the mandate and so forth--basically, everything's fine with the Affordable Care Act, except we don't like this Medicaid coercion thing; we don't like the way the extension is done. Let's make it optional. States have the option to expand under the way the law specifies; or they could not extend, and just keep the existing program, leaving many people without the option of Medicaid. And so now every state is deciding whether to expand or not. Now, what 'expand' means is not just one thing. There's actually quite a bit of room in terms of how Medicaid is specifically designed. Arkansas, for example, instead of expanding in a traditional public-program way, they've decided to expand by just having all of the expansion population be eligible to go get private insurance through the health insurance exchanges that are going to be set up. So instead of having a separate public Medicaid program, they are going to put all those people on the exchanges. And there's a whole debate about: will that cost more, and what are the advantages of this and the advantages of that. But the point being, states have the option to not expand Medicaid at all, or expand it in some--there's a range of options they might consider in how they design their expansion. Russ: And let's close with your thoughts on how this study is going to affect that outcome. Guest: My prediction is this study will be used in part of the debate. It's kind of like the Reinhart and Rogoff work, where you can say: Did this study influence policy or was it just used to justify positions that would have been taken anyway? But I think you'll have this study cited by state legislators and others debating whether they should expand or not, and some of them may cite it and say: Look, this study showed that Medicaid didn't improve physical health; or they might even say it didn't improve health at all--here's the study. And I'm sure some people will use it to say: Look at the result on depression; look at the financial benefits; this is hugely valuable. And I think very few people will say what I would say, which is: This study showed some positive benefits for Medicaid and this study was uninformative on some others. And meanwhile, the actual choice here is not some other thing like giving people cash--that's just not on the table. The choice is whether people get some assistance or none--poor people. And I come down on the give-them-some side rather than none. But I think very few people are going to use this study in that way. Russ: Thanks for helping us understand it. |
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| 0:33 | Intro. [Recording date: April 30, 2013.] Highlights to come later this week--Econlib Ed. |
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| 0:33 | Intro. [Recording date: April 16, 2013.] Russ: Before I get started I want to mention I recently hosted an event at Butler University that was co-sponsored with Liberty Fund. The event was called "Capitalism, Government, and the Good Society." Richard Epstein, Mike Munger, and Robert Skidelsky spoke on the topic and then I moderated a conversation between the three of them. Today's guest, James Galbraith, was supposed to make that a quartet, but weather intervened and he wasn't able to arrive in time for the program. There will be a very nice video of the event, produced by John Papola. When it's available we'll put up a notice at the EconTalk home page and I'll tweet on it. I remind you that you can follow me on Twitter at EconTalker. And we may get an EconTalk podcast out of it. But in the meanwhile I'm happy to have scheduled this interview with James Galbraith so that listeners can get a sense of his worldview. So let's get started. | |
| 1:33 | Russ: Our topic today is inequality, but we're going to get into some other issues as well. Now, James, you have a very different view on the topic compared to either what I would call the mainstream view on either the left or the right. Many on the left argue inequality is partly caused by a lack of progress by the median worker; since the 1970s, the average person has been left behind; and so it's not just inequality that we need to worry about--it's stagnation. On the right when we talk about inequality the argument you often hear is that--and this is certainly a common view among many economists, left and right--that the growth in inequality over time is due to technological change, differences in productivity that have been biased against low-education, low-skilled workers. Now, what's wrong with those arguments in your opinion? Guest: I think, particularly in the case of the second, they start from a hypothesis which was framed before there was any factual foundation, a body of evidence against which one could judge it. Russ: It sounds good. Guest: The way you've characterized the first position, it's really not about inequality at all, but rather tying up the term into a larger set of concerns about the stagnation of wage growth. And I think that's a substantially different set of issues. How does my approach differ? I've been working on this for, oh, between 15 and 20 years. And from the beginning I realized that if you wanted to speak sensibly about the subject you had to enrich the available body of measurement, in order to be able to get a clearer picture of what's been going on, both in the United States and the wider world. And that's been the foundation of now three books on the topic, of which Inequality and Stability is the latest. Russ: Well, let's take each of those claims of the left and right--and I certainly agree with you that the claim I attributed to the left does conflate inequality with what you might call middle class progress or middle class prosperity or the middle class, period. But I think in our debate, as a nation and out in the world, I hear that all the time. Those issues do get mixed together. It's unfortunate, because I think they are two different issues, but they do get mixed together. So let's start with this argument about technological change. It seems reasonable. We see, if we look at the growth of, say, income over time, measured by college or lack of college or high school diploma or no or part--no diploma but some high school--there are large differences in the growth rates over time in those numbers. Do you think those are important? Are those numbers wrong? Guest: I think the mistake comes from beginning the analysis by dividing up your sample population according to the reported educational credential, and then treating those groups as the primary units of analysis. Fundamentally that's not going to tell you--if it turns out that something else was decisive in differentiating incomes of people who happen to have these different educational credentials, this approach to the analysis is not going to allow you to discern that. And it turns out that if you start with a much more eclectic approach to the primary information set, to the classification, you can distinguish the things that are important from things that aren't. And there simply isn't any evidence that inequality is being driven by educational status as such. Clearly, it's quite possible, indeed the case, that people with higher levels of educational credentials also tend to be people who have access to kinds of employment and to kinds of asset holdings which will lead them to have very rapidly growing incomes and be the beneficiaries of, be on the winning end of a rise in inequality. But that's a far cry from saying that this is in some sense causally related to their educational status. It's not. Russ: So, you are arguing--let me stick with the standard argument for a minute. The standard argument is that as globalization has increased and as technological change has encouraged the information economy, people with high levels of education are particularly benefited by that move toward the information economy; people at the low end of the distribution are competing because of globalization with low-wage workers outside the United States. So they have trouble sustaining any wage growth. The high end is benefiting from the increased demand for their services. And that, I would say, is the standard economists' view. I have my own issues with it. Guest: Right. That view has been in circulation since the early 1990s, when it was advanced in a very prominent article in the American Economic Review. And, at that time--as I said, the evidentiary foundation for it was practically nil. What you had were some surveys, widely disparate times, showing that income inequality had increased between the 1970s and the late 1980s, for example. And it was very hard to know. First of all, this is data restricted only to the United States, so it's a very, from the larger standpoint of economic analysis, provincial perspective. But secondly, given that the information set was so limited, you really couldn't tell when the increase in inequality had occurred specifically or link it to the changes in the structure of the American economy over the course of the 1970s and 1980s. So what I did in the first book I did on this, which was a book called Created Unequal: The Crisis in American Pay, appeared in 1998, was to construct new inequality measures based upon data from the Bureau of Labor Statistics (BLS), Employment and Earnings datasets. Which enabled one to basically track out the rise of inequality in pay structures on a year-to-year basis. And it became very clear from that the rise in inequality was a temporally limited phenomenon--that things had been driven up very dramatically by the recessions of the early 1980s; that what people who lived through that period knew to be the dominant fact of the time, which was that a lot of well-paid blue-collar workers were losing their jobs, was in fact the thing that's most closely associated with rising inequality in the wage structure. And that's clearly--it's a deep stretch to link that to educational status. The fact was that they were well-paid, unionized jobs, all across the American mid-West that got wiped out in the surge--first of all in the recession and then in the surge of globalized trade that followed it. But mainly it was the recession of the early 1980s that you can see very clearly in the data. | |
| 9:32 | Russ: So let's--before we get to the larger picture that you have to tell with your data, I want to go to the argument that I mentioned earlier from the left. Which again is somewhat of a mainstream view, I think among many economists, left and somewhat to the right, which is that, putting inequality in itself to the side, that there has been middle class stagnation for the last 30 or 40 years. You are critical of that view. Why? Guest: I would say I'm skeptical of it. The median wage, as a technical concept, is a very slippery entity. One can easily imagine a world in which every individual has growing income from work, wage income, over their lifetime, as a result of seniority and promotions and so forth. And yet the median wage remains stagnant. And the reason for that would be that people at the high end, at the end of their careers, leave the workforce and retire. People who come into the workforce as young people come in at lower wage rates. So the population, the person who is at the median, is changing all the time. One of the things that did happen in the United States over the 1980s and 1990s is that you got a great many older white male workers who retired, left the labor force. Or were forced out--again, in the slump in the early 1980s in particular and then again in the late 1980s. And a great many people came into the labor force, mostly in service jobs, who were younger, predominantly, or more predominantly female, members of minority groups, and immigrants, all of whom were going to enter the labor force at relatively low, below-average wages. And the effect of that is going to be to pull the median, which is the middle, the pay to the 50th percentile, the middle worker, is going to pull that to the left. So you are going to have a situation in which the median is stacked--it's not necessarily reflective of any individual's experience. Russ: I make that point about every three episodes of this podcast and also at my blog, Cafe Hayek, but it doesn't seem to dent the mainstream. Nor has your critique of the standard technological change view. So I share in any frustration you have over this. Guest: Yeah. I don't think it's a political point, actually. I think that it just suggests that these very compact statistical representations of what's going on are not very informative. | |
| 12:55 | Russ: So, give us your view. How would you characterize what's happened in recent decades to the distribution of incomes in the United States based on the different pieces of work you've done? What's causal? And give us any stylized facts, too. Guest: Sure. Let's distinguish a couple of things. One of them would be the distribution of pay, which is to say what people get in return for labor for work hours, wages and salaries. If you isolate that element--and that's leaving aside the component of income that doesn't come from work, that comes from asset ownership--if you just isolate the pay from work you find that it tracks very closely to the unemployment rate. And the reason for that is that people who are, I suppose, like you and me, paid on a salary basis--our incomes don't vary very much with economic conditions. But people who are paid on an hourly basis and whose hours vary from week to week depending on economic conditions are very sensitive to the economic situation. And in a weak period their weekly earnings, which is what is actually being measured, tends to fall. And in a strong period tends to rise. And so the pay structure, as measured, which is really a structure of weekly earnings, tends to become more compressed and egalitarian when the unemployment rate is, let's say 4% or below. As it was in the late 1990s. You can see this very clearly in the data. Now, if you are looking at incomes, the picture is entirely different, because the picture is governed, the inequality of incomes is governed, by the contribution made by capital income. By stock options realizations and capital gains and related--also incomes paid by firms which are basically drawing on venture capital and paying out the proceeds of that kind of investment to their employees in hopes of breaking into new markets. And so you have incomes which are extraordinarily concentrated in a small number of sectors and parts of the country. The financial sector is always very important because it's the source of the funds and [?] the fees on all of this. And then whatever it happens to be financing at any given time is important. So in the late 1990s you see this in the technology sector. And in the mid-2000s you see this in real estate. And it shows up very clearly in the data, and it's not ambiguous about what's going on. But that income inequality which is driven by capital incomes is really reflecting the experience of a very small piece of the population. One of the things I do in the book is to isolate how many counties it would take to make this effect go away altogether, and the answer is: 15. Russ: Yeah, that's rather remarkable. And those 15 are concentrated, if I remember-- Guest: This is from 1993-2000, and these are--Manhattan--New York, NY--is always an important piece of the picture. And the other big piece in the 1990s is Silicon Valley and King Country, Washington--Seattle. So, it's, as I say, looking at the data and breaking it out in this way gives you a pretty clear and unambiguous picture of what's going on. Russ: Yeah, I found that fascinating, so let me just try to restate it. If you take 15 counties in the United States, and you take them out of the data, and these counties would be from--I would summarize it as where the financial and high tech sectors have a strong role to play in employment and wages-- Guest: in the 1990s-- Russ: You take those out of the data, then between 1993 and 2000 you see no change in equality in the United States? Guest: No change in income inequality measured between counties. Now some counties are very large and there are obviously increases in inequality that would still be within counties. But the component that exists between counties is a very important one. And you can isolate it in the data very easily. It tracks the overall inequality measure very well, say, something that's done from the Census. And you can show that the extent to which incomes [?] in a very small number of places, really driving the changes. Russ: So, going back to your earlier point, that was a time when unemployment was relatively low, and what was pushing the change in equality that did exist were increases in the demand for the services of people that were really good at computers and finance, right? Guest: Well, it's really--increases in the demand--a lot of these firms never developed markets. It's really the financing of the investment of those firms, and the incomes paid out from those investment flows that's driving it. Markets are developing at this point but not all of these firms, perhaps even not many of them, are actually making their money out of cash flow from the public. Russ: I'm thinking the workers, though, whose skills were in demand and whose salaries were being paid accordingly-- Guest: If you happened to be employed, and this is a tiny number of people, by one of these emerging firms that was a favorite of Wall Street at the time, of course you--people were falling all over themselves to bid for your services. But it was even better to be an owner of those companies or chief executive, because then you were participating directly in the rise of the stock prices. Russ: And that's at the very high end, presumably. Guest: Sure. It's at the top. These are people whose names we know. Because part of their corporate strategy was to advertise how rich they were. Russ: I often like to point out that we should care about why people get really rich, if we are going to worry about it all; and somebody who gets really rich by developing a great piece of software or a company that makes my life better or a basketball player I like to watch or a singer I enjoy listening to is different from a Wall Street exec who perhaps has done nothing productive and who has not made my life better. I would make that distinction. In that particular case, the 1990s, as you point out in your book, in the tech sector there was a lot of investment made that turned out to be somewhat valuable. Some of it failed of course, and those firms disappeared and their owners lost all their stock money. But others thrived and the ones that thrived tended to be the ones who made the world a better place. Guest: Uh, up to a point. I mean, one could also argue that some thrived because they had extraordinary protection of their patents. And other intellectual property. And that they managed to fight off the Justice Department's Antitrust Division very effectively. The identity of these companies is not a secret. Some of them are not that well loved by the customer community. Russ: Which ones are you thinking of? Do you want to-- Guest: Oh, gee, just guess. Russ: A lot of them, I love. I mean, I like Google, I like Apple, I like--I'd probably like Cisco if I knew enough about them. Intel. Some of them in the tech sector, yes, maybe not as loved as others. Guest: I think there's a large company up in Seattle that you haven't named which has at least a reputation of having an ambivalent relationship with its customers. Russ: Yeah, it's true. They are still here, though. Guest: They are indeed. | |
| 21:14 | Russ: Let's look across industrial sectors. A remarkable aspect of your findings that you didn't highlight--I was struck by it--maybe I've misinterpreted it. But you looked at two different eras of economic change. You look at, I think, 1993 to 2000, and then you look at 2000-2006 or 2007. And instead of looking across space, which is what we just talked about, you look across industrial sectors. And you find that there are very large differences in how industrial sectors have performed. Guest: There are, of course. And after the NASDAQ bust in 2000, you can see the rise and fall of--several little cycles that occur during the George W. Bush years, of which the first was driven by the wars. Driven by the reaction to 9/11, by the invasion of Afghanistan, eventually by the war in Iraq. And one of the things that shows up both sectorally and geographically is this funnels money into enterprises that are closely linked to the government and in locations that basically circle the national capital. Which becomes at that point the locus of income growth in the country. It's a very strange phenomenon for what was ostensibly a conservative Republican administration. But there it is. Russ: Well, government got a lot bigger under George Bush. Guest: It certainly did. And any country which is launching major military operations is going to experience that. And then, the Iraq War is the peak, the first year of the Iraq War is the peak of this phenomenon, because after that the buildup, it doesn't go away but it doesn't continue to get larger. And so its effect on the growth rate of the economy basically washes out after that. And what you see carries the economy forward into 2006, 2007 is real estate. The construction and the loans being made to increasingly dubious borrowers that eventually blows up, 2007, 2008. Russ: So the data that you are looking at in those analyses is from the BEA, the Bureau of Economic Analysis. Guest: Yeah. Russ: The one thing that's striking about it--I wasn't sure of the level of the data, whether it's--it's not county? Guest: It's county level, yes. There are two kinds of resolutions here. One is geographical at the county level, so you can map things out over the 3150 counties the country has. And the other is by sector within states, so that you can again look inside each state's boundaries at the distribution across various economic activities in that state. Russ: So, when you are looking at different industrial sectors, say you are looking, to take one example, at finance. You are looking, actually, at a very different kind of data than is usually used in these kinds of discussions. Usually what people are looking at are individual or household data. Guest: Correct. Russ: Sometimes from tax returns, sometimes from government samples of various populations. Guest: Usually, most of the other researchers working in this area are either working with tax records or working with the Current Population Survey (CPS). But you are looking at something that in many ways is more appealing, which is, first of all you are not looking at wages. You are getting a very complete picture of income that goes way beyond earnings. It includes bonuses, dividends. My understanding is it's also based on payroll. Is that correct? Guest: Yes. Two different kinds of data. Russ: So let's stick with the industrial sector ones, the statewide data. Guest: That's payroll data. Russ: So you have, every firm in theory, or at least a sample of firms in the state in, say, finance, based on what they pay their workers, inclusive of everything. Not just wages. Correct? Guest: That's right, yes. Russ: Does it also include transfer payments at the statewide level? Guest: No. Russ: Okay. So this is--I would call it 'compensation.' Guest: Yes. Russ: It does not include-- Guest: 'Pay' is the word I use, because we are looking at what the employing unit pays out. Russ: It's disbursed. Guest: It's not what the individual earns, because an individual might have multiple sources of income, multiple jobs, other assets. It's not what the household earns, because the household may have multiple earners. And there's no adjustment here for household size. In other words, it is not a measure which is directly related to individual household welfare, which is an important topic; it's not what I work on. It's related to the payments structure of the economy. And that has a real usefulness for a lot of questions that economists have been concerned with, including the one you mentioned earlier, which is: What is the role of technology? The role of technology, really, when you think about it theoretically, it's about what businesses will pay for specific jobs, and if you have to approach that through for example what people are reporting as their incomes, tax records, or what a sample survey is reporting for household income, then you are really looking at it through a rather murky glass. Because you are several layers removed from the effect of the technology on the structure of business. Russ: And you are also often missing types of payments and benefits that are not captured by some of the data that people focus on, such as wages or income. You don't include vacation days. Do you think those data include health benefits? I don't know what they include there. Guest: I don't think that they include health benefits. Russ: I assume not. Guest: That's a question I'd have to double-check. Russ: But what struck me when I looked at that--and to help the listeners who don't have the table in front of them, and I don't have it in front of me but I remember it: What we're looking at here is disbursement pay--that is, pay--by sector, across states, over a period of time. So when I looked at the 2000-2006 or -2007 changes by sector, I was struck by two things. One, I was struck by the enormous increases by sector for some of the sectors, where pay to workers over time doubled in a very short period of time. That's correct, right? Guest: Yes. Russ: You might say, well, in the heyday of the Internet it's not surprising that the people who could successfully manipulate web pages and do the things that were desperately in demand, it's not surprising that those wages and salaries and benefits went up a lot. But this is across fairly wide definitions of sectors. So you list, I think 15 high-growth sectors. Am I remembering correctly? Guest: That's right. They are, however, in relation to overall employment fairly small. And so, again, what we're picking up is the same phenomenon that is described at the geographic level, which is that the rise in inequality is really a matter of the increasing difference between a small, favored sector that is experiencing a credit-driven boom, and the rest of the economy, which includes almost all the rest of us--who are going along as before, experiencing very little direct effect of this phenomenon. | |
| 30:16 | Russ: But I was struck by--you have the last line in both these tables, one is the pre-2000 change, one is the post-2000 change: there is a line called 'All Other Sectors.' And there's huge growth in all those sectors. Not compared to the top 15 or the top 8 or 6 that grew the most. But I was struck by how much growth there was across the economy. And I mention that again because we are often told that nobody is benefiting from these changes except people at the top. I accept the idea that there are sectors that are benefiting a lot more than others. But I was struck by how much positive change there was across the economy as a whole outside the highest growth sectors. Guest: Oh, I don't know what to say about those numbers. They are not that dramatic, and these are all in nominal terms so there's no inflation adjustment here either. Russ: That was my next question. Guest: The point of the tables you are looking at is to permit the reader to get some sense of what the proportionate changes were in sectors so there was really no need to adjust them. But the All Other Sectors as compared to the high-growth sectors in these tables, they are relatively low paid and their nominal wage growth is--well, in both cases you are looking at a phenomenon that is probably ordinary for a trough-to-peak business cycle change. Russ: Do you have that table in front of you? Guest: Yeah, 6.1 and 6.2. Russ: Can you just read the bottom line; say what time period they are and give us the change? Guest: This is 1996-2001, and the All Other Sectors number is $31,000-$38,000 Russ: That's over 25% in 5 years. It's nominal, but inflation wasn't very high then. Guest: Yeah, but it's also from a trough, close to a trough, to a peak. It's a period of substantial business cycle expansion and a major drop of unemployment. For 2003-2007, roughly $39,000 to roughly $44,000. A 10% increase over 4 years, so that's 2%, 3% a year. I don't think there's anything remarkable about that. Russ: Well, it is to me, just because of what we commonly hear. Obviously, this is a very complicated area. There's a lot going on. There are interactions--when we change one thing, we change other things that we can't hold constant. I just find it interesting how pessimistic most people are about the state of our economy. Even in good times. We're not in good times now. But even in good times. Guest: Just looking at that first table, which is 1996-2001, this was a very strong period for labor earnings. The unemployment rate went down to below 4% for I think 4 consecutive years, and you had a lot of demand for hourly labor. This was also the period when poverty rates--well known, remarkable moment for prosperity, poverty rates declined to historic lows. Russ: But even in that later period, the 2003-2007, which, a lot of people have described it as not much of a recovery after the 2001 recession; that any gains that occurred in that period--they may have been temporary, because obviously credit issues that we are going to talk about in a second. But it's interesting to me how big those gains are. Guest: Well, people do experience income gains in a credit boom. I don't think anybody will look back on this 2003-2007 period as a-- Russ: Golden Age? Guest: As a Golden Age. You can make an argument for the 1990s in that there was this technological transformation going on, where clearly everybody was living in the backwash of that. But the 2000s, we are looking at, on the one hand, the growth of government thanks to the wars, and on the other the impending real estate debacle. It's very hard to see permanent benefits from either one of them. Russ: I agree. | |
| 34:55 | Russ: Let's go to the longer picture. If we go back to 1980, say, or even into the 1970s, your suggestion then is that a lot of the changes in economic prosperity that differed across groups depended on how close you were to that credit increase of various intensities at that time period. Is that accurate? Guest: Yes. There's a real change in the driving forces behind American economic growth after 1980. Before that there is, you could argue, a fairly balanced set of institutional spurs to growth, with the result that you get a growth path which is reasonably steady, both public and private components. After 1980 we become very heavily reliant on the credit cycle and the credit cycles become increasingly intense until you get the great debacle and the end of the last decade. Russ: So, when you say 'credit cycle,' what do you mean? Guest: The growth basically of bank credit and associated private sector venture capital extensions, with the cycle coming when the flow stops. Which it did in 2000 in the tech sector and 2007 in the real estate sector. Russ: So, do you see that--what was going on differently in the pre-1980 credit cycle, then? I'm trying to understand what's going on differently. Is this a statement about monetary policy or other things going on? Guest: A lot of other things going on as well. Monetary policy plays a much smaller role in the 1950s and 1960s than it came to play in the 1970s and 1980s. But in the 1950s and 1960s you have, first of all the growth of the public sector. You have the extension of social welfare programs in the Great Society. You have the Treaty of Detroit--the strong presence of collective bargaining institutions which gave organized labor an increasing claim on resources as time went by. And then you also have the growth of private sector credit. But no one of these phenomena is dominant in this period. Whereas after 1980, basically labor has been neutralized-- Russ: Organized labor. Guest: Organized labor has been neutralized so there's no further increase in collective bargaining settlements. And the welfare state--it's not taken apart, but it doesn't grow except in a few isolated episodes. Russ: Health care being the obvious example. Guest: Well, the Medicare Part D under George W. Bush, for example. But fundamentally the institutional structure isn't expanding after that. And so the locus of growth really shifts to that which is driven by the financial sector. You can see that very clearly in the data. | |
| 38:32 | Russ: So let's try to talk about that a little bit and then let's talk about what policy issues are related to it. My sympathy with your viewpoint, which is, as you admit in the book, not a mainstream view--but it seems very consistent with the data, at least the way you gather it and work with it. The part that I'm sympathetic with is in our profession of academic economist, the rewards to being an academic economist have gone up quite a bit since I've been a practicing economist, which is roughly 1980. And I think you pretty much follow the same pattern as I do in terms of timing--that's about when your career started. Guest: That's about right, yes. Russ: And I like to think I am a lot more productive than I was, and I am more productive. But it's hard to understand why my skills are in such demand relative to what they would have been in a different world. Another way to take that out of the picture is to look at starting salaries in academic economics, and they've grown dramatically over the last 30 years, 40 years; and it's hard to argue that that's because economists are so much more productive. If anything, I think we are more dangerous. We are in high demand academic life; we are part of an education system that likes--people like to major in economics. So when I look at my own situation I'm trying to figure out how much is due to the fact that we subsidize education in a whole bunch of different ways, versus how much of it is due to the fact that we subsidize finance, a field that competes with academic economics for people to work in, on Wall Street. What are your thoughts on that? Guest: Well, this gets to another, a very interesting domain of American sociology, doesn't it? I think the second explanation, that economists are competing and having their salaries pulled up by the business schools, which are having their salaries pulled up by their connection to the financial sector, is certainly an important piece of the picture. Because there is also the fact that--and having lived through this transition it's very visible to me--that in the 1950s and 1960s the young population of the country had an enormous sense of security and confidence about its future. Which permitted people to have a great deal of diversity of aspirations. That changed in the 1970s and 1980s. Insecurity went up dramatically, as unemployment became a real threat. And that drove many people into much more economically competitive career paths. And so you see this in the rise of economics departments and business schools in colleges and universities; people will go into them because they feel, maybe rightly, maybe wrongly, it's a practical way to get yourself a career that makes money. Russ: So, should we do something about this? This sensitivity of incomes and compensation to the credit cycle, to monetary policy? What can be done, if anything? What should be done? Guest: I'm inclined to favor stabilizing institutions and social insurance. Particularly when you are moving into a period of stress, the important thing is to maintain decent floors. And decent and stably secure futures for people, which means covering them from the most extreme risks. And I think that the important of this in our present political debate really focuses on Social Security, Medicare, Medicaid, which have been institutions which have come to define American working class, middle class life by providing basically an inalienable floor that will keep you on of extreme poverty, and has successfully done that for senior citizens and also for dependents and survivors; and providing a couple of layers of protection against medical bankruptcy and against old-age-related bankruptcy, which is what Medicaid basically achieves for the middle class. Protecting those programs from what are essentially predatory attacks, efforts to restrict and limit them so that other players can cherry pick from the insurable population and make a little extra money is an extraordinarily important political task in my view. And I would add to that: I'm very much in favor of a strong minimum wage, which should be substantially higher than it is now. And the reason for that is that it helps to set a standard for the performance of the labor market. Which I think is something that we observe very clearly, particularly in the part of the country I happen to live in, is really undermined by allowing a low wage standard to prevail for workers at the low end of the scale. What you get is a market which becomes very insecure, relatively unsafe, very hard to monitor and protect [?] safety and health standards and causes a lot of other problems that would basically be greatly reduced if you had a much stronger minimum wage. | |
| 44:36 | Russ: Well, let's talk about those two pieces--the safety net and the minimum wage. On the safety net side, do you think means testing Social Security and Medicare, which I think would easily make them solvent for the foreseeable future--are you against that or in favor of it? Guest: I am very much against it. Solvency for a government program cannot be distinguished from the solvency of the government itself. Russ: True. Guest: So I think treating Social Security and Medicare as though they were some kind of private funds is not a reasonable approach. Russ: Well, at their current levels, they're going to be hard to keep the promises that have been made. Guest: Well, only if you insist upon--well, first of all, that's debatable. But secondly, if you accept the pessimistic projections, it's only if you insist that you match the payout to the Federal Insurance Contributions Act (FICA) revenues for a very, very long period into the future. And I'm inclined to first of all say it's not necessary to do that, as an economic matter, certainly; and secondly, even if you think it's the right thing to do politically, it's a problem that can be dealt with down the road. It doesn't have to--treating those projections as though they were some kind of dire situation at the present is a clear mistake. Russ: You don't think there's a demographic problem with Social Security? Guest: Oh, no. I've been in the Census since 1960, when I was 8 years old. As has every other baby boomer, including you. The demographics have not--the demographics actually have become more favorable since they were addressed in the 1983 Social Security changes, because you've had more immigrants than were expected at that time. Russ: It's true. Guest: So, those are not the issue. Russ: Why are you against--let's go back to the fundamental question. Guest: Means testing is a very complicated problem, particularly for elderly people, because their 'means', their qualifying means, change all the time; and would be adjusted to accommodate whatever the means-test standard is. So first of all it's a cumbersome and unpleasant system which would give people kind of variable access to Social Security and Medicare. But secondly, we have a means test in the system. We have a perfectly good one. It's called the income tax. And if you want people to pay into the government in relation to their means, that's what a progressive income tax achieves. There's absolutely no need to layer onto that some kind of means test for whether you have to pay the cost of a catastrophic health incident, traffic accident or a heart attack or something of that nature. Russ: But I don't need a retirement safety net; and I'm happy to have paid for my grandmother when I was younger. Guest: Ah. You are, however, a person of great philanthropic and charitable instincts, and our fellow citizens should not be expected to rise to that standard. Because many of them don't. Russ: But, you've also made it harder for people to take care of themselves in their old age by taking more money from them than you otherwise-- Guest: No. No. You've got to remember that I study inequality. Diversity is the essence of any population. And what we have out there amongst the elderly are a great many people who don't have children who would take care of them, because they don't have children at all or have children who can't take care of them for one reason or another. The main one being that even with all the best will of the world, those children have children of their own who are a higher priority. Russ: Well, I'm talking about--I disagree with that for a different reason, because I think private charity would be a very good thing. But let's put that to the side-- Guest: We had private charity, we relied on private charity, up until the creation of the Social Security system in the 1930s, and the reality was that most old people didn't live very long. And I'm enough of an economist to believe that when you pay people to do something, they'll do more of it. And what Social Security does is to pay them to stay alive. And they are quite happy to take the money and live longer. Which to my mind is an excellent thing. Russ: I don't see the causation there. I don't see the causation quite as effectively as you do. Guest: Send people a check, they eat. This keeps them alive. Russ: I don't think people died from lack of resources in 1930, even old people. Guest: Oh sure they did. Lots of old people suffered privation, right up until the 1970s. Russ: Perhaps. But we're a richer country than we were then. I don't see that. But I had a different point I was making, which is that you are taking money away from young people when they could be saving it. It's a nontrivial amount. And the Social Security system has been doing that for 70-something years, and that's made it more likely they'd need a safety net. Guest: Well, again, just extending the argument I just made, there are two kinds of working people: people who have parents that they would otherwise support, and people who don't. Russ: I'm talking about people supporting themselves. Guest: No, but hear me out. I'm in the second group. My parents have passed on. They were never a burden on me, but if they never had been, they were no longer the case. But I still pay the payroll tax, which means I'm paying in to support-- Russ: other people's parents-- Guest: the whole population, everybody else's parents. Which lowers the burden on everybody. It's a very reasonable system. Russ: Well, it raises the burden on you. Because you have less money for your own retirement. Guest: Well, but it lowers the burden on people who would otherwise have a significant burden. So it seems to me that it's a very fair system. Which is why it's so popular. Russ: I don't think its fully understood. It might be popular even if it were understood. I'm willing to accept that. Guest: People do understand it, and that's why they like it. Russ: What percentage of the U.S. workforce thinks that their Social Security "contributions" that come out of their paycheck every week are put aside for them? I think it's a nontrivial number. I'm sorry, I could be wrong. Guest: That's a polling question. Russ: It's a rhetorical question. Guest: It's a polling question; I'm not a pollster. | |
| 51:07 | Russ: Let's move on to your second piece of your safety net, which is the minimum wage. So you want a higher minimum wage. How much higher? Do you have a rough idea? Guest: $12 is my number. On that I'm drawing by the estimable conservative publisher of the American Conservative magazine, Ron Unz. Russ: Lucky you. Now, is there any cost to that increase? You talked about what you thought the benefits were. Do you think there would be any changes in employment for low skilled workers? Guest: Oh, yes. Now the whole point is to help change the structure of the labor market at the low end. And so yes. For example, if you think about what happens inside households, there would be some teenagers, presently working at the minimum wage, who would leave that labor market, in part because their parents would be making more money if their parents are also low-end workers. So, you'd get change, reorganization. The real issue, which is the point of contention here, is whether this would mean a higher rate of unemployment for low end workers. And we have now quite a lot of evidence that, perhaps somewhat counterintuitively to supply-and-demand-trained economists, that refutes that idea. A very important experiment has been carried out since 1999 in the United Kingdom, where they didn't have a minimum wage and they introduced one; and it has disappeared from political discussion in the United Kingdom because not even the most skeptical Tories think that it has caused unemployment there. It hasn't. Russ: Well, I actually don't think unemployment is the right issue. I think it's employment. And I think it's the difficulty it causes for people with low skills to get the experience and the first step into the labor market. I find it strange that people who--and you may not be in this group--obviously point out the eagerness with which businesses substitute capital for labor and foreign workers for American workers somehow think that's not going to happen if we artificially raise the wage. So, I don't accept that empirical evidence. There's a lot of evidence on the other side. And I would suggest-- Guest: Let me just come back at you on the second part of that. There are two things that would go on. One is that businesses would experience increases in some of their costs on the wage side. But they would also experience customers with more money coming through the door. And my view, as a matter of employment theory, is that businesses hire more workers when they need them. If they have more business and they are expanding, then they'll hire more people. Then they will pay the minimum wage. On the question of bringing in foreigners-- Russ: Not bringing in foreigners. Moving factories overseas, all the things that have happened-- Guest: Well, that's a tradeable goods issue. Most manufacturing is so far above the minimum wage it's not going to be affected by this. Russ: No, I'm not suggesting it would be-- Guest: We're looking at the overwhelming number of jobs which are service jobs, basically non-traded sector, non-moveable. And the question is: What would be the effect of a higher minimum wage on the incentive to bring low-wage immigrants into the market? The answer to that is that if you have a job which is paid decently enough so that a documented worker, a citizen or permanent worker, will take it, then you have no incentive to bring in an undocumented immigrant to hold that job. Because you couldn't pay that person a cut-rate wage. And that is the reason why this is attractive to a certain type of, I think, very thoughtful conservative, who are very concerned about maintaining the American labor market for American workers. That in fact it would discourage the use of brokers and shady labor contractors to bring in people to fill jobs at cut-rate wages. And they're right about that. I think it would have that effect. Russ: Yeah, but you missed my point. My point is that, we see from lots of evidence that businesses are willing and able to change the mix of labor to capital when capital gets relatively attractive and when overseas workers get relatively attractive. That's part of the reason that people move factories overseas. Guest: But again, you are coming back to the factory issue. Russ: It has nothing to do with the factory issue. It has to do with how firms behave. Firms are sensitive to wage rates. Guest: That's right. I'm going to give you a different theory of how firms incorporate new technology. If this were a more technical discussion I'd give you the references on it. But fundamentally what firms do is they apply the establishment wage rate to the best technology, which may well be a labor-saving technology. But they will save money on adopting that technology whether they are paying a relatively high or a relatively low wage to the workers that they have. There is, I think, no good reason to think that there is kind of a flexible frontier of the textbook variety between what we'll call 'capital' and 'labor'. There's a high-level theoretical discussion around that which I'm sure you are aware of. But I would take the position that in fact a wage rate is not an important determinant of whether firms move to a more advanced technology, because in fact they'll make money by moving to that technology even if they are paying a relatively low wage. Russ: We'll agree to disagree on that. Guest: Yeah. | |
| 57:04 | Russ: We're going to move on to a last topic. Maybe we can find something we can agree on a little more easily, and that's the relationship between the government and the financial sector. We started off talking about how the financial sector has driven a good chunk of inequality, both spacially and sectorally. How much of that do you think is due to the privileges that sector has accrued, and what would you want to do about those? Guest: Well, a great deal of it is due to privileges asserted and conceded to the financial sector. Deregulation in the 1990s, desupervision in the 2000s--which permitted a great many practices that would have been suppressed in an earlier period. And should have been suppressed. Practices that were frankly financial fraud, and which have been given a legal impunity which they did not enjoy in the 1990s. In the aftermath of the Savings and Loan debacle, first under Reagan in the late 1980s and then under the first Bush, the government prosecuted a whole spectrum of financial criminals and sent a thousand of them to Federal prison, in some cases extended periods of time. Nothing like that has happened in the wake of the far more severe fraudulent practices which came to dominate the financial sector in the 2000s. And so one of the great, one of the most cataclysmic failures, of the Federal government--and I'm speaking of the present Administration--especially has been its unwillingness to come to grips with the problem of the basic integrity of financial practices. And the problem there is--it's a market problem. If people don't believe their financial institutions are trustworthy, they are not going to extent, permit them to have resources over and above what is insured by the Federal Deposit Insurance Corporation (FDIC). They are going to be extremely careful; they are going to be staying much more liquid, in much safer assets than they would otherwise be willing to do. Russ: Well, I'm sorry to say we fixed that by extending the FDIC, beyond the letter of the law; and by bailing out institutions that weren't covered by the FDIC. Guest: The FDIC was the best-performing of the agencies in the crisis. Russ: Agreed. Guest: And I think Sheila Bair's book is really an excellent account of the role that it played. If you have deposit insurance accompanied by adequate, effective, enforcement, to my mind that's okay. It's where you have the bailout of an institution and of shareholders and of people who have capital which was at risk and deliberately put at risk, who were beneficiaries of fraudulent practices, that's where you run into, I think, the deeper problem. Russ: Well, especially the creditors of those institutions, who were made whole, weren't required to take a haircut. The FDIC was one of the only institutions that did require it, and it did in maybe one important case; but most of the time the creditors were spared. Which I think has been a terrible mistake. Guest: We can agree with that. The shareholders of insolvent banks should take the loss. And then you start again with assets that retain their value. Russ: Let's close and talk about economics as a discipline. You think economists have learned anything from this Crisis? And what should they have learned? I think I know the answer to the first part. Guest: I'm waiting for evidence. What I would have liked to see was an opening up of economics departments to a genuinely wide-ranging discussion of these issues. But so far as I'm aware, the first appointment to a so-called 'top department' of someone who was a true dissident from a prevailing orthodoxies has not yet occurred. The first one, so far as I am aware. Nobody has been brought in from the cold as a result of this. And that is--it just tells you how far the management of economics is from being a true marketplace of ideas. |
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| 0:33 | Intro. [Recording date: April 15, 2013.] Russ: Topic is cities; start with recent post you had at the New York Times's blog, Economix, on Detroit. Give us a brief history of that city. It's not doing well right now, but it wasn't always that way, was it? Guest: No. If you look back 120 years ago or so, Detroit looked like one of the most entrepreneurial places on the planet. It seemed as if there was an automotive genius on every street corner. If you look back 60 years ago, Detroit was among the most productive places on the planet, with the companies that were formed by those automotive geniuses coming to fruition and producing cars that were the technological wonder of the world. So, Detroit's decline is of more recent heritage, of the past 50 years. And it's an incredible story, an incredible tragedy. And it tells us a great deal about the way that cities work and the way that local economies function. Russ: So, what went wrong? Guest: If we go back to those small-scale entrepreneurs of 120 years ago--it's not just Henry Ford; it's the Dodge brothers, the Fisher brothers, David Dunbar Buick, Billy Durant nearby Flint--all of these men were trying to figure out how to solve this technological problem, making the automobile cost effective, produce cheap, solid cars for ordinary people to run in the world. They managed to do that, Ford above all, by taking advantage of each other's ideas, each other supplies, financing that was collaboratively arranged. And together they were able to achieve this remarkable technological feat. The problem was the big idea was a vast, vertically integrated factory. And that's a great recipe for short run productivity, but a really bad recipe for long run reinvention. And a bad recipe for urban areas more generally, because once you've got a River Rouge plant, once you've got this mass vertically integrated factory, it doesn't need the city; it doesn't give to the city. It's very, very productive but you could move it outside the city, as indeed Ford did when he moved his plant from the central city of Detroit to River Rouge. And then of course once you are at this stage of the technology of an industry, you can move those plants to wherever it is that cost minimization dictates you should go. And that's of course exactly what happens. Jobs first suburbanized, then moved to lower cost areas. The work of Tom Holmes at the U. of Minnesota shows how remarkable the difference is in state policies towards unions, labor, how powerful those policies were in explaining industrial growth after 1947. And of course it globalizes. It leaves cities altogether. And that's exactly what happened in automobiles. In some sense--and what was left was relatively little, because it's a sort of inversion[?] of the natural resource curse, because it was precisely because Detroit had these incredibly productive machines that they squeezed out all other sources of invention--rather than having lots of small entrepreneurs you had middle managers for General Motors (GM) and Ford. And those guys were not going to be particularly adept at figuring out some new industry and new activity when the automobile production moved elsewhere or declined. And that's at least how I think about this--that successful cities today are marked by small firms, smart people, and connections to the outside world. And that was what Detroit was about in 1890 but it's not what Detroit was about in 1970. And I think that sowed the seeds of decline. |
| 4:25 | Russ: So, one way to describe what you are saying is in the early part of the 20th century, Detroit was something like Silicon Valley, a hub of creative talent, a lot of complementarity between the ideas and the supply chain and interactions between those people that all came together. Lots of competition, which encouraged people to try harder and innovate, or do the best they could. Are you suggesting then that Silicon Valley is prone to this kind of change at some point? If the computer were to become less important somewhere down the road or produced in a different way? Guest: The question is to what extent do the Silicon Valley firms become dominated by very strong returns to scale, a few dominant firms capitalize on it. I think it's built into the genes of every industry that they will eventually decline. The question is whether or not the region then reinvents itself. And there are two things that enable particular regions to reinvent themselves. One is skills, measured education, human capital. The year, the share or the fraction in the metropolitan area with a college degree as of 1940 or 1960 or 1970 has been a very good predictor of whether, particularly northeastern or northwestern metropolitan areas, have been able to turn themselves around. And a particular form of human capital, entrepreneurial human capital, also seems to be critical, despite the fact that our proxies for entrepreneurial talent are relatively weak. We typically use things like the number of establishments per worker in a given area, or the share of employment in startups from some initial time period. Those weak proxies are still very, very strong predictors of urban regeneration, places that have lots of little firms have managed to do much better than places that were dominated by a few large firms, particularly if they are in a single industry. So, let's think for a second about Silicon Valley. Silicon Valley has lots of skilled workers. That's good. But what I don't know is whether Silicon Valley is going to look like it's dominated by a few large firms, Google playing the role of General Motors. Or whether or not it will continue to have lots of little startups. There's nothing wrong with big firms in terms of productivity. But they tend to train middle managers, not entrepreneurs. So that's, I think the other thing to look for. And one of the things that we have seen historically is that those little entrepreneurs are pretty good at switching industries when they need to. Think about New York, which, the dominated industry in New York was garment manufacturing. It was a large industrial cluster in the 1950s than automobile production was. But those small scale people who led those garment firms, they were pretty adept at doing something else when the industry jettisoned hundreds of thousands of jobs in the 1960s. No way that the middle managers for U.S. Steel or General Motors were not. Russ: So, I want to stick with this general issue for a minute and then we'll come back to Detroit. But I've heard this before that the way that a city thrives--it's become to me a bizarre policy cliche--you need lots of college graduates. As if somehow that's a magic wand. And, number one, it doesn't seem like a guaranteed magic wand. And number two, we don't know anything really about why college graduates like to live in particular cities. If you are Iowa City--that's a bad example. Let me pick Biloxi, Mississippi or Wichita, Kansas that don't have as many college graduates as, say, Raleigh Durham or the Silicon Valley, and you are the mayor of one of those towns, of which there are millions, and you are told: Oh, we know how to make the town do better. We just need more college graduates. So what's the policy implication of that for the mayor? Guest: Well, it's only slightly more helpful than reminding the mayors of the power of January temperature in predicting areas' success, which is an even more useless fact that I'm prone to remind people of. You are right. There are relatively limited things, certainly in the short run, that you can do about it. I tend to think that this just pushes you back toward the basics of good city government, that college graduates are not fundamentally different in the sense that they care about good schools and decent commutes and safe streets. I do think there is a little bit of bite in it, though, when you think about local redistribution. So, I think there are lots of reasons why we should be wary of localities trying to run their own social safety nets, the ease of exit for companies and for richer people. But if you are focused on the incredible importance of people at the high end of the human capital distribution, I think that makes you even warier of trying to do the sort of thing that Detroit did after 1970 of having sort of very aggressive social policies that weren't particularly attractive to people with high levels of human capital. That's why I think this has some policy bite, although it's certainly not as if you can just turn on a dial and all of a sudden your share of college graduates increases from 10 to 40%. Russ: It's easy--you just need a lot of hip places and cool coffee shops. Guest: That's right. Russ: I've remarked on this program before that one of the stranger policy secrets that used to be popular when I was in St. Louis was farmer's markets. Because college people like farmer's markets. So if we have farmers' markets we'll do better. And those kind of magic wands I don't think do very well. Guest: Yeah, I think that's probably right. Russ: Not that there's anything wrong with a farmers' market. I like them myself. Guest: No, actually compared to other things localities do, they tend to be fairly cheap. It's not as if things are likely to be magical. We do know in terms of the causal chain of that stuff, if one believes Enrico Moretti's work on this, the national policy to establish land grant colleges in particular places does appear to have had lasting effects. Now that's not a cost-benefit analysis of land grant colleges. That just says that those places that had land grant colleges prior to 1940 have had a very good thirty years after 1980. But I don't know what that means for a mayor, given that they don't particularly have the ability to establish a land grant college or even any sort of technical university, unless of course you are Michael Bloomberg and you are going to plop one down in the middle of the East River. Russ: But one of the obvious again apparent-to-the-eye kind of correlations that people do see is the synergies between great universities and innovation in an entrepreneurial environment. Again, I think cities, probably incorrectly, have decided that therefore they need to have a lot of incubators, places where smart young academics can help them start companies. Not that, unfortunately, some cities aren't very good at helping that. But they think that's got to be a good, again a way to get there from here. Or to try to make their schools, their universities better, as if there were an easy way to do that. I think obviously that's a very difficult thing to do. Guest: Right. I think that's absolutely right. You get to more sensible local policy implications when you sort of stick with the things that local localities are already doing and you ask how to make them more friendly to this. So, one thing, if you thought that the spillover from local universities were powerful--indeed, I think there's a fair amount of evidence supporting that--you want to make sure that your land use regulations or spaces close to those universities are relatively friendly for building new relevant space. So it's not an issue of subsidies for these areas, but it's an issue of making sure you haven't zoned it off for single family detached houses in a way that enables no one to take advantage of that. So I think that feels a little more sensible. Boston is in the midst of this thing called the Innovation District--a former industrial land downtown on the waterfront in fact--and I'm relatively positive about this thing. It's not involving a huge amount of state subsidy. It's relatively prime real estate. You could--it's not hard to get people willing to build on this. But I think from a political point of view it's easier to justify zoning for commercial industrial mixed view space when it's sort of wrapped with the magic of startups. So, I don't have any problem with localities if they want to justify sensible things by saying it's about tech clusters. But spending a fair amount of money to try to create an artificial cluster does feel like a very dangerous thing. And certainly the work of Josh Lerner, whose fine book Boulevard of Broken Dreams reminds us of how difficult it is for localities to actually do this. There are far more failures than successes. |
| 13:02 | Russ: So, let's go back to Detroit. What's your diagnosis of what went wrong there in particular? Guest: So, the seeds of the industrial decline were I think set in this very large firm-intensive industrial monoculture that was very heavily invested in lower-skilled or at least less formally skilled workers. I think it's not that those Detroit workers weren't skilled, but they were skilled with very firm- and even task-specific skills that made them particularly bad at adjusting to new things. And then on top of that you had a number of unwise policies that tended to be very infrastructure- and construction-intensive. And I think this is part of want to think about in terms of what public policy does, particularly in declining cities. It is so natural and so attractive to plunk down a new skyscraper and declare Cleveland as 'come back.' Or to build a monorail and pretend you are going to be just as successful as Disneyworld, for some reason. You get short term headlines even when this infrastructure is just totally ill-suited for the actual needs of the city. The hallmark of declining cities is to have funded structures and infrastructure relative to the level of demand in that city. Like, Detroit, more than 90% of the homes in central-city Detroit are valued significantly less than construction costs. It never made sense for the federal government to subsidize the building of new housing there in the form of urban renewal. And it certainly made no sense after the Highway Aid Act of 1973 to spend hundreds of millions of dollars on a monorail that glides over often-empty streets. Easy to get around downtown Detroit. You didn't need a monorail to help. So, some infrastructure is certainly appropriate in growing places, and certainly if we were talking about the cities of India we would be talking about the need for better water, better electricity, better transit infrastructure. But not Detroit. And what I think Detroit really needed was better investment in its schools and its safety, rather than thinking that you were going to fix everything with a monorail. Russ: And the lesson--do you want to draw any lessons from that for the constant cry we hear of the need for more infrastructure spending? Do you think America's infrastructure is--I did a podcast with Robert Frank on this. He points out, as many have, I think it's the American Society of Engineers gives America's infrastructure a grade of D. I've suggested that maybe they aren't the best people to hand out the grades; they kind of have an incentive. Guest: Yeah, I have suggested such a thing as well. If the American Medical Association (AMA) argues for more health spending, do we think that they are completely disinterested in it? Russ: But do you think we have an infrastructure problem in the United States? Guest: I'm not an engineer, so I can't tell you about crumbling bridges. I think they do want some serious set of tools for avoiding safety risks and perhaps those are inadequate. But, two major points on this. When I think about America as a whole, I see an amazing amount of infrastructure. And it certainly doesn't appear to me that we are deeply lacking in infrastructure. That wouldn't have seemed to me to be America's primary lack. I worry about competitiveness over the next 50 years; I am far more concerned with the quality of our schools than the quality of our highways. And the second thing which I think is central is I see no reason; almost all infrastructure can be paid for by users rather than the general tax revenues. I just cannot possibly see why we think that the crumbling bridge is a job for taxpayers far away rather than the users of that bridge. Or our airports need to be paid for with general tax revenue rather than by the generally well-heeled customers of those airports. So, I am certainly willing to believe that there are particular points of infrastructure that need upgrading; but if they can't be upgraded with the fees on their own users then I'm going to be much more skeptical about the need to upgrade it. Adam Smith said this quite clearly, quite eloquently, 240 years ago, that the best way to avoid white elephant projects was to fund those projects with fees on the people who were actually going to use them. Those words remain true today. Russ: Of course, you make an exception for baseball stadiums, I'm sure. I think the obvious problem is that whatever the economics case is for allowing people far away to pay for your stuff, on the grounds that, say, well, someday they may come to your city--the problem is the political incentives there are rather destructive. Guest: Absolutely. And given current electronic tolling facility, if they come to our city they will pay for the roads by going on them and having their credit card charged to ride them. They don't need to pay for it if they are not actually using the roads. |
| 17:59 | Russ: You mention that you are much more worried about our schools than our highways. I think that's a very good concern, and I share that. But my guess is that Detroit, in this period we are talking about where things didn't go so well, I'd say 1970 to the present, a mere 43-year bad run, during that time I suspect they spent a lot of money on schools. They just didn't spend it very well. Or they face problems that the amount of spending couldn't overcome. Guest: It's always the case. It's not the sheer dollars involved in most of American cities, it's the way those dollars are being spent. I think usually the best case for spending more is that it's the only way that we can get reforms is by giving something to the interest groups that need to be bought off. But if I think about Detroit, if I think about schools going forward, I would be very--I mean, I think they should have done this 30 years ago--very intensive on charter schools or other voucher-like experiments rather than thinking they should come from the public system. Russ: Is there anything going on like that now in Detroit? Guest: Yes. In fact there's a--there are a lot of charter schools going on. There's a particular philanthropist who is very invested in them. Last time I was in Detroit I visited a charter school that was in the old GM building, where Harley Earl designed so many of the glories of GM's heyday. It's tied to a school of industrial design that was a charter school that kids looked so full of hope; I of course asked for randomization and test scores and they weren't able to deliver that yet. But it was a very positive sign. And I was almost feeling good about this situation until the Principal started talking about how things would really take off when they got a light rail stop outside of their school. And I looked outside--the streets were empty. You could drive 60 miles an hour down the street, and no conceivable need for a light rail stop. But there's something in Detroit's DNA which makes it think what it really needs is transportation technology. Which is not at all what it needs. But the charter school movement is there; it just needs to be pushed harder. And I think the more troubled a school system is, the more the case is for going almost entirely private. Which I think would not be a crazy thing for Detroit to contemplate. Much as I think that privatization of public spaces, particularly really dysfunctional public spaces right now, is not crazy in the context of Detroit. Russ: Now there have been some very successful uses of, I don't know what you want to call it, private public partnerships. I note that Bryant Park in New York has been a very nice story of that kind of change. I don't know if it's representative of anything but it's a very nice story. Guest: Yes. Absolutely. Bryant Park is special. Russ: Now, this particular charter school you are talking about, the one devoted to industrial design--you say 'devoted to industrial design' or however you worded it-- Guest: It's tied to a grown-up school that does industrial design, quite successfully, for adults. So it has an institutional connection. But it's a broader--it's a normal school. Russ: But the point is, it's not a college prep school of the traditional kind, hoping to send kids off to first-rate universities to major in liberal arts. It's got a different focus. Guest: You know, a bit of both, I think. I don't think they're precluding that. It's not purely vocational tech. But it certainly has some ties to hard skills that are valuable as well. Russ: Do you think that kind of vocational approach is something we should be doing more of? Guest: I think we certainly should be open to it. One of the virtues of having more charter line system is we get more innovation in this system and we get more opportunity for experimentation on it. Certainly in many areas there is lots of popularity of schools that are getting particular skills; we certainly see this in the popularity of many private educational institutions that are delivering hard skills to people. I think that if you have a more competitive system in the public school system in Detroit you will naturally have the delivery of skills that are offering economic value for customers, ex post, for students, after school. It would be helpful for economists to provide information about which of these skills are more desirable. But I see a lot of hope in the direction. Russ: Do you think it's important that those kids at that charter school or at any other ones, whatever good schools there are in Detroit, that they stay in Detroit? Do we really care? We see Detroit has declined. One way to look at it is to say: Well, people vote with their feet; it's a terrible tragedy for the people who are still stuck there because there's not much opportunity. But the most talented ones will leave. They'll go improve other cities. Do we care about Detroit per se? Guest: It's not that we don't care about it. But our primary focus is on people in Detroit, whether or not they choose to live in Detroit or elsewhere. So, the important thing is that those kids are well-educated and find a brighter future wherever they find a brighter future. So, it's not particularly, I mean I'm not disturbed by a kid who moves from Detroit to Houston to find a great life there; and I think that's absolutely right. So, the spirit of your suggestion is quite reasonable to me. I think there are a couple of minor caveats that I'd like to put out there. One of which is: The way that we've structured local government is that we have mayors who are responsible for places[?]. So, I do think it is David Bing's [Detroit Mayor] job to make his city as functional and successful as it can be. Although part of being functional and successful is just educating his kids, not minding if they move elsewhere. In some sense, an analogy I like to make between cities and companies on this, and local and national policy. So, it certainly shouldn't be the business of the national government whether or not one company thrives or fails. We want good national policies, and then there are winners and losers. But it's the job of the Chief Executive Officer (CEO) of that company, to make sure that it thrives. I see that the relationship between cities and national policies being somewhat similar. If the federal government should be picking winners and losers in particular places, it shouldn't be trying to prop up declining cities or populations in particular areas. But when you are looking at David Bing's perspective, he needs to have a bit of a place-related perspective that focuses on his particular location, making it as healthy as it can be. Russ: And he's the Mayor of Detroit. Guest: He is the Mayor of Detroit. Russ: Former National Basketball Association (NBA) player, I remember his jumpshot well. |
| 24:42 | Russ: Now one thought, which I think is probably the result of confirmation bias, but maybe not, but I have when I look at some declining cities--and I may be cherry-picking here, so help me out--is that in many of them, they have had long periods of sustained, one-party rule. The city of Detroit is an example. The city of St. Louis. The mayor always comes from the same political party. There is going to be inevitably an accretion of corruption, patronage, inertia. How important do you think political competition is, or the lack of it, in explaining some of these cities that have failed? Guest: So, I certainly believe in political competition, as much as I believe in competition elsewhere. I've never seen anything that was empirically compelling on this, and I immediately think of a counterexample, which was of course Boston, which of course has had one-party rule for half a century. And often not all that much competition within the city, but at the same time is-- Russ: Successful. Guest: Yeah. So, I don't think it's necessary. But certainly it must be helpful. And one of the things that is quite interesting about New York is despite the fact that on some national political spectrum it's a very democratic city, but over the last 80 years, 40 of them have had mayors who were at least first elected as Republican. LaGuardia, Lindsay, Bloomberg, Giuliani. Which tells you that there is considerably more competition in New York than in most of these places. In part that's just because of the large size and because people are interested in running this city. But for sure it's helpful. The one thing I know that there's hard data on is the work of Fernando Ferrero and Joe Djurko on the impact of party affiliation and what mayors do, and they have this nice regression discontinuity design that enables you to compare those cities where a Republican won with 51% of the votes to one in which a Democrat won with 51% of the votes. And what they find is very little difference in the center between the two parties. Which goes back to the old line that there's no Democratic or Republican way to clear out the trash. That one of salutary things about cities is that because they are involved in very tangible outputs, they tend not to be as ideological. And they tend to be more driven by delivering basic city services. Although certainly many cities fall down on that and assuredly competition is helpful in creating some pressure on that. Russ: So, if you were mayor of Detroit yourself--King of Detroit, I'd like think of, or maybe you have David Bing's ear, which maybe you do--what would you do? Give me a short term plan and a long term plan. Guest: As you know, Detroit is currently being more controlled by the data pointed financial officers who have power relative to Bing himself. But it's not really rocket science. If you think of it as an overall plan, I would have essentially a transition close to a complete charter school provision in terms of the education side. So I would move almost completely out of the public school education business, if I were Detroit. In terms of policing, I would be doing more in terms of borrowing from those cities that have had very successful turnarounds in the quality of their policing. So, I know for example there's a project going on where they are borrowing from New York's successes. Boston has also had a reasonably successful policing--so many cities have. I'm not a police tactics expert, but I'd certainly be borrowing from that. I would be trying to privatize as much of the dysfunctional space in the city as I possibly can. The city, its physical footprint is so large, that creates just a very, very hard cost equation. They have not been as aggressive at using eminent domain to level neighborhoods as say for example Flint has. I'm myself quite wary of the use of eminent domain; every part of me that fears the excessive use of the power of the state, fears eminent domain, although I'm willing to believe that there are occasions where it is necessary. In this case I think there's a better approach. Which the mayor is basically following, which is you are going to restrict the areas in which public services are available all for [?] aid to people who are outside those areas, and then either charge them for the incremental cost of city services if they are outside of it or basically not provide certain city services outside of these core areas. Russ: What kind of services? Guest: Well, let's say trash pickup or something like that. I don't know exactly how the system is operating in Detroit in terms of the full area. But you need to do something that says, makes people in their locations pay for the cost of their actions. And if it costs considerably more to have city services available elsewhere, you need to have some pressure on that pushing people to relocate to areas which are more compact. And once you've done that you can essentially think about whether you can sell off the space that remains; and sell off in a way that literally shrinking the physical footprint of the administration within the city, so that in some subarea you are essentially selling to some private developer who essentially makes a private town within that area. It's essentially free from city interference, free from city cost. So I would do more to shrink to greatness, of trying to make the city's physical footprint somewhat smaller, use more private competition the school side, and do more in terms of borrowing from other cities on police side. |
| 30:54 | Russ: So you introduce that discussion by saying it's not rocket science. And yet I don't think there's any city, other than the third part about maybe giving up some land that's not very productive--is there any city doing anything remotely like this that's aggressively privatizing education and its other services? And some of its land? As a way to revitalize itself? And if not, it's either not rocket science or their something else involved. Like politics. Guest: Well, I tend toward the latter. You started by making me king, which I took as a fairly absolute level of power. So that's certainly part of it. New Orleans has probably been the poster child for very aggressive charterization in the wake of Hurricane Katrina, so that's where I'd look. This thing that Dan Gilbert is doing in downtown Detroit is an example of trying to privatize some of the space. Russ: What's he doing? Who is he? Guest: He's the entrepreneur, the chairman, of Quicken Loans. And he's a Detroit native. And he's purchasing a fair amount of downtown real estate in Detroit, trying to sort of rebuild some part of the central city, buy a lot of very high density space with skyscrapers available for a song in central city Detroit. There's a question as to whether or not this project will actually work. But as much of the city that can be gotten off of Mayor Bing's books, those will certainly make his financial problem less severe; and I'd like to see more innovation in terms of the public side of running Detroit. I think the main reason why you don't see more of this is indeed politics. And for a mayor to admit that his, that he can't manage part of the city is an admission of failure, I don't think it's an admission of failure that Mayor Bing should feel bad about making in that the reasons for the difficulty are not of his doing. But it's politically very hard to do that, obviously. The power of interested parties in education that preclude large scale charterization is enormous. And policing is also a fairly, can also be fairly political. It's notable that that's the area where Detroit has actually been most aggressive in actually doing exactly the same thing I would do in that situation. So maybe the politics are less difficult there. Russ: Do you have a feel for what proportion of Detroit's employment right now is public versus private? Guest: Well, we have county business patterns data on this. That would be Wayne County rather than Detroit proper. So, Wayne County includes Detroit. Between 1998 and 2010 the number of paid employees in Wayne County declined from 755,000 to 570,000. So that's really a massive difference. And the number of manufacturing employees, the traditional heart of the Detroit economy has literally declined by 50%, from about 120,000 to about 60,000. One of the areas that's still very, very robust, and this gives [?] public private, the issue is that health care and social assistance, an industry that is traditionally driven by public sector spending, that is now 100,000 employees out of Wayne County's total 568,000. Russ: That's large. You alluded a minute ago to this idea of making people pay for the services--you said it in a couple of different places and ways--that they use. What's your thought on urban sprawl generally? Do you think it's a problem? Have we subsidized the suburbs overly in a way that's been destructive? Guest: We probably should be doing more to make sure people pay for the social cost of their actions. I think it was always inevitable that America would rebuild itself around the automobile. I don't think the right answer is we should expect no sprawl. Or tiny amounts of sprawl. We should expect a lot of sprawl. I think we can have somewhat better policies. We come back again to think about highways. It's I think entirely appropriate that people should be paying for the costs of driving, including of course myself, both in terms of either using gas taxes or better yet using tolls to do that. And obviously when you have new development it should pay for the social cost of hooking up public services that are involved. I don't think that that would massively reduce the amount of building on the urban edge. I think the lure of the car and car-based living is very, very strong. Russ: People like grass. They like yards. Especially people with kids. So I think, obviously there are people who like to raise their kids in a city, but there's always I think going to be people who want to raise their kids in a less urban environment. Guest: Sure. When I think about urban policies more generally I tend to think about eliminating those policies which create bias in one way or another. And that the policies that are anti-urban are the transport policy. Which--and this particularly came together in the coalition that gave us the Highway Aid Act of 1973--it thought about that if you bundle together public transit spending with highway spending that that's somehow or other neutral on this. But highway spending really has a massive difference in the accessibility of far-flung area. There are huge differences created by running a highway down the area. So that really pulls people out. Whereas adding a people-mover to Detroit does virtually nothing. It's a very bad deal for cities. I think most cities would be better off to give up on the public transit aid from the federal government and just say: We'd similarly like to stop spending general tax revenue on highways. The situation has only gotten worse in the stimulus package and the recent transport bill of last year. We've really gone from a system where we expected drivers to pay for the bulk of the cost of their roads through gas taxes to a world in which we are much more comfortable using general tax revenues to do it. And it's hard not to think that that's a mistake, in many dimensions. The secondary bias I think is significant is the way that we handle housing policy in the country. Having a very pro-home ownership policy also means you have an anti-urban policy, because typically single family houses are owner-occupied whereas multi-family dwellings are rented; on average more than 85% of multi-family dwellings with 5 or more units are rented, exactly the same percentage holds for single-family occupancy being owner-occupied. So if you are going to have federal policy which both directly, through let's say the home ownership interest deduction, or indirectly, through Fannie Mae and Freddie Mac are going to subsidize owning, you are going to be stacking the deck against high rise houses. So I think there are many reasons why we'd like to reform our pro-ownership policies. But that's yet another reason for it. Guest: Now the last thing that artificially stacks the deck against cities is just the way our local education systems work. So, by your telling me you kids like to go tromping around in grass, that's great; my kids do that. I have no problem with parents making those choices. However, I grew up in the streets of Manhattan and that can also work perfectly well. The problem is that we've created such a strong schooling incentive for people to move out of those cities that have weak school systems. I think anything that we can do that tries to somewhat reduces those spacial, those schooling-related, which are fundamentally government-created incentives to suburbanize, that's probably a good thing. So, for example, if you could imagine moving to a region-wide charter/public school system where you could choose any school anywhere within the region to go to, whether it's public or charter, that would be a system that would largely break down the incentives to locate in a particular area. Of course, that's politically completely infeasible. But anything that makes schools less problematic in urban areas would be helpful. Russ: Yeah. The idea that if you want your kid to go to a good school, which strangely enough many parents care deeply about it, means that you have to live in the neighborhood of a good school, is--it's like saying, if you want to have a really good car you have to live near where it's made. It's a bizarre connection that we just take for granted now because it's been that way for so long. It clearly has a terrible impact on the poor, in particular; and of course, I think rich people don't just want to have lots of grass for their kids. They also want to have really good schools for their kids. And they also want, maybe want their kids to go to schools with kids like them, which could be part of the reason that's going to be a difficult thing politically to break. It really bothers me a lot. It's terrible. It's 'free.' Hey, free schooling. But unfortunately, if you want to live near a really good school you have to pay an enormous premium for your house. So it's not free. Terrible. Guest: Absolutely. |
| 40:41 | Russ: Well, let's move away from Detroit to cheerier climes. A lot of cities are doing great today which weren't doing well before. What has changed? What are they doing right? What have we learned? Guest: I think most of the reason they are doing great has to do with economic changes, not necessarily with all that much that the cities themselves have done. Although the one thing that you would give cities like New York a great deal of credit for over the last 30 years is they have become dramatically safer. And that is really directly tied to a public service. Russ: Maybe. Maybe demographics. Guest: Tied. Tied. Russ: Fair enough. Guest: I have written papers arguing that our ability to explain changes in the crime rate are very, very limited. So I'm with you on this. But it certainly is tied to it. People should be able to give at least some credit to the New York Police Department (NYPD) and the Boston Police Department. So, the larger framework is, you go back to the 1970s. All of America's older cities were hit by the move to urban sprawl. All of these cities had grown great around transportation cost advantages that one time figured very, very largely in the growth of those cities. I think the railroads in Chicago or think of the harbor in New York City. Over the course of the 20th century those transportation cost advantages had largely been eliminated. And as a result, the older, manufacturing industries like New York's garment center that had once been the lynchpin of the local economy, those industries moved elsewhere. They disappeared. And as industry fled there was often a fiscal crisis that ensued because the tax base had hollowed out. Often there was social unrest, with riots and rising crime rates, and it really felt, in the mid-1970s when I was a kid growing up in New York was that the time of the city had come and gone. But something happened. Something changed. And it had a lot more to do with private industry than anything the government did. I tend to think of this as being about what globalization and new techogies did to the returns to skill, the values of high end information-intensive industries that have always had a particular reason to be in urban areas. Proximity is useful for moving industrial goods around, but it's also useful for connecting people. You see this quite visibly in Wall Street and midtown Manhattan, these gigantic clusters of financial services and [?] business patterns that at its height in 2007, 43% of the payroll on the island of Manhattan was in finance and insurance. New York's resurgence was built on finance. Partially this was a global change to support finance. But I tend to see that more generally as being a global change towards information-intensive industries, part of the general rise in returns to skill. And finance has remained rooted, although there certainly is plenty of suburban finance as well, in cities because cities really do have an advantage connecting smart people and enabling them to learn from one another. There's no other industry in which having a bit more knowledge can make you a millionaire overnight. There's no industry where that is as true as in finance. If we look at other cities which have had comebacks, they typically are also tied to information-intensive industries. You think about Boston's comeback based on various sciences, biotech as well as finances. Seattle--1971, two jokers put a sign on the highway: Leaving Seattle, last person to leave town please turn out the lights. Seattle, once again a city very much built on human capital. Think about the companies that now define Seattle--Amazon, Costco, Microsoft, Starbucks. None of these things were really in existence 40 years ago when those guys put up the sign. There was a little bit of action on the Starbucks front. They are all entrepreneurs and it's all very information-intensive, it's all very innovation-intensive related to skilled customers and producers. And that's really what the story is over and over again. If you want a very sort of clear example and sort of the role that globalization plays in this, globalization increases the return to having a good idea, because you can sell it across the whole planet. That is nowhere more tangible than in Hollywood, where the global market for American movies is huge, and yet it is still very geographically rooted in a particular area, which is the cluster of movie creativity. So, I can see posters advertising James Cameron's movie Avatar as I wander through the most disadvantaged areas of India's cities. And yet that globalization is not hurting American cities. It's creating more incentive to be right in the midst of the action in Hollywood. And I think the piece of evidence that I like best is the idea that all this new technology that enables long distance communication isn't making face-to-face contact obsolete. The clearest example I can think of is Silicon Valley itself. Which doesn't look like a traditional city, and of course it is based around the car, but it is still very much in that traditional game of enabling people to connect with one another and to learn from one another, enabling flows of ideas across companies and within companies. And it's not a coincidence that the most information intensive, technology intensive industry is also the one that is the most famous example of a geographic cluster in the world today. It's not a coincidence that Google, which could not be more connected to long distance communication, for its own employees it builds the Googleplex, with very few walls and lots of face-to-face connection where they are all hoping to be with each other learning from each other all the time. That's the sort of narrative that I think works behind this comeback of some, but not all, cities. |
| 46:38 | Russ: I love that story, but I'm a little bit skeptical about it. I'm quoting you--this is a different way of saying what you just said--"Cities work best when they are filled with smart people and small companies that innovate by exchanging ideas." The part I'm a little skeptical about is the 'exchanging ideas.' You have this image of Silicon Valley or Hollywood or Boston 128, Texas, that there's this ferment, these new ideas; when they come along they infect in a positive way a whole bunch of places. Is that really true? Is it really something more than just the fact that it's efficient, that there's lower search costs, to find new employees, that they're already there when you want to start a new company? Is this idea of exchanging ideas, is it a little overrated, over-romanticized? Guest: It is certainly possible because we, our own industry, is a very innovation-intensive industry and certainly-- Russ: Are you talking about mine and yours? Guest: Yeah. Russ: Education? Guest: Well, education and economics research. Russ: Okay. It's not so innovative in my opinion. But go ahead. Guest: Education, no. Economics research, yes. Sure. Right? I mean, every paper is an attempt to say something new about the world. Russ: Yeah, I'm not sure they're very successful. I'm not sure we've learned a lot since, oh, 1950. But I'll keep an open mind. I'm serious. Carry on. Guest: Well, we certainly think we're in that business. And it is certainly true that in my life's experience and the experience of most of the people I talk to, the role of communication with other economists is critical. And a lot of that communication occurs face to face and fairly random meetings within one's firm and often across firms. That's certainly true in Cambridge and certainly been true in my line. Russ: Well, we give seminars. We go on the road, we give seminars, we talk to other people, we share ideas. Is that going on in Silicon Valley? They don't give a lot of seminars. Guest: But seminars are ideas at a fairly well-developed stage. I think a lot of the sort of creative side occurs well before your paper is designed, when you are still in the process of trying to figure out what the right topic is and how exactly to proceed with your empirical strategy. And that doesn't occur in formal seminars. That occurs in ordinary conversations, while you are walking down the hall or while you are just stopping by someone's office or just while you are having coffee with a colleague from a different university. I've certainly found those incredibly valuable in my life. Russ: I totally agree. I just think education--let's call it research--in general, academic research--is very different from corporate innovation. Or small business innovation. I don't think when a small business comes up with a really great idea, I don't think they share it with anybody. I think they keep it to themselves. Guest: Well, certainly the stories of Silicon Valley from the early days suggested a fair amount of inter-firm collaboration and conversation. Which is somewhat different from the model today. So if we think about Silicon Valley's transition, the 1960s seem to have been an era when there were lots of little firms that talked to each other. The key book on this is Annalee Saxenian's Regional Advantage where she compares Silicon Valley in the 1960s with the Route 128 cluster in Greater Boston. Where the Route 128 cluster was very much that Big Firms walled off from each other, exchanging ideas in the firm perhaps but not very much with other firms. Where she saw Silicon Valley as having lots of people meeting for drinks after work and talking about new production processes and exchanging ideas. The model of Silicon Valley today--and if you think about Google or say, for example, Yahoo's new policy of requiring people to work from home, these are much more like Detroit's giants in the sense that they are very large firms. They are firms that are deeply concerned with the exchange of ideas within their companies but much less likely to have the people in those companies connect with people in other companies. So it may be that you're having an illusion, but there's plenty of history that supports the general notion that there are idea spillovers across firms in Silicon Valley as well. And of course we have the hard evidence of patent citation, which Jaffee, Trajtenberg, Jaffe and Henderson find are more likely to cite patents that are geographically close to them even when they are not in the same company. Russ: Yeah. On the other hand, you have Inside Apple by Adam Lashinsky who documents people in Apple weren't even allowed to share ideas with each other in Apple. Despite the story that Steve Jobs liked to put the mailroom and the bathrooms far away so you'd have to wander around and run into people. There's also a lot of secrecy. I think the story, to me, makes more sense when you think about--it comes back to your point--how unvertically integrated the information technology and computer business is. So my guess is a lot of that synergy takes place among firms that are working together as suppliers and as contractors, and they work on different problems and they have to interface. If they had been vertically integrated we would have lost a lot of that, but the fact that they were not vertically integrated, they were much more--smaller and more nimble, and one would hope more innovation--maybe made a big difference. Guest: It certainly is true that innovations are carried through various actors in this supply chain. And that certainly is right. And there certainly are many other reasons for agglomerating other than just sharing ideas. So I think that certainly is the case. However it does really appear to be true that there are particular agglomerations that are enormously productive, and they do tend to be heavy in idea-oriented sectors. |
| 52:47 | Russ: You call cities our greatest invention. What do you mean by that and why is it true? Guest: I think it's true precisely because when you look at the greatest hits of humanity--and I guess this gets back to our previous conversation--almost all of them were largely collaborative. And a large number of them involved people learning from other people within cities, through face-to-face interactions. And that's why I think of cities as being so important, because they are enabling us to do what we do best, which is to learn from the people around us. Now obviously that can happen in a company that is far away from an urban center. It can occur in different ways. But the life's blood of the city is enabling us to benefit from people around us. And I guess it's not just about learning, of course; it's about any collaborative enterprise. It's like trade, which started off as being much more geographically restricted than it is now. It's about social connections, and various forms, and cities enable that. All that proximity enables us to work with other human beings, and that is fundamentally--our best asset as a species is being able to work with others. Russ: You want to list some of those greatest hits? Guest: Sure. I'm thinking of Athenian philosophy, Renaissance art, the mass-produced automobile. All of these things are quintessential urban inventions all of which occurred within clusters of genius, where we have very well documented cases of people connecting with each other and learning from each other, and collaboratively producing something much better than anyone could imagine those people would produce on their own. So, in Renaissance art, Florentine art, it starts with Brunelleschi's mathematical comprehension of how linear perspective works, making two-dimensional space appear to be three-dimensional. Which then gets passed along to Donatello, who puts it in the form of low-relief sculpture on the wall of Orsanmichele in Florence. That then gets passed along to their close friend, Masaccio, who puts it on the wall of the Brancacci chapel. Marvellous picture of St. Peter finding a coin in the belly of a fish. Passes along to his friend, Filippino Lippi, passes along to Botticelli, and so forth. All these people knew each other, were borrowing each other's ideas, expanding it, figuring out new ways to use it, and collectively producing something truly and wonderfully marvelous. If you think about the irregular clustering of artistic genius, particularly places in particular times, that isn't because the water is better in Florence. It's not just because of the patronage of the Medicis, for example--much of this stuff occurs before their greatest artistic involvement. That clustering is readily explainable because of the spillovers across people. Because one person comes up with an idea and then other people play with it. A similar thing occurs in France in the late 19th century in French impressionism. People have an invention; they move away from trying to have art that closely captures what we see when we see the outside world to something that's more experimental, and people are riffing on this for 20 years, creating masterpieces. I think I already discussed the Detroit case, but again, it's people who were very proximate to each other, all of them trying out new things. In that case I think you are right, that often the suppliers of various parts where the chains of ideas moving across people. And of course Athenian philosophy is the classic example of people sitting around talking to each other on street corners and in salons and over wine, and all of a sudden a new way of thinking about the world emerges. Russ: That's very beautiful, and I think you are absolutely right. It's interesting to think about how important in those days--the 1500s, France in the 1800s--physical proximity was incredibly important, because you were out of it if you weren't near those folks. Although, at the same time I think of Adam Smith in Edinburgh, in Glasgow. He did make a trip to Europe, but most of the time he was hanging out in Scotland. Pretty far away from the action. Guest: Oh, wait a minute. No. I dispute that. I dispute that because of the Enlightenment. Russ: You had a lot of action there. Guest: Yeah, but not part of the connectedness to Europe. An amazing amount of action. When you think about the people involved in Edinburgh and Glasgow during the heyday of the Scottish Enlightenment, I think it's a fantastic example of how people are learning from-- from Hume-- Russ: Adam Ferguson. Guest: Or think about the chain of people, in exactly the same place, if you want to search the physical sciences, that James Watt learned from. So, James Watt was part of this cluster along the natural sciences side along with creating the steam engine. The Scots had an amazing urban scene at that point in time. Russ: It's true. |
| 57:47 | Russ: Do you want to close with something about zoning? Guest: This gets to the more general question of governments and cities. First of all, it is clear that there are often negative externalities associated with people living in the same place. Which is why cities were very much at the forefront of certain public services. Which are in fact appropriate. The problem of unclean water in cities actually required a significant amount of public intervention in terms of the water, particularly in the 19th century when it was very difficult to actually monitor the quality of the water. Investments like the Croton Aqueduct were really crucial in changing cities from being the killing fields that they had been. A boy born in New York in 1900 was expected to live 7 years less than the national average. Similarly, cities actually need government in the form of policing. And in the form of dealing with congestion as well. Now, it's possible, in the context of your audience, it's possible to imagine an entirely privatized street system, I guess. I think that's there's lots of upside in things like public-private partnerships in things like new highways. But when it comes to the overall grid of a town, it's possible to imagine doing these things on a private basis, but it's awfully hard to imagine how it would work. I mean, the holdup problems are just enormous. Once you have a public street system you naturally need public policies that mitigate congestion, and I think a [?] on congestion charging is the right way to do those. You could imagine, by the way, having the roads completely owned by a private entity in the sense of a private city. That's not an infeasible thing. But you need some central entity to actually hold it. So cities do need, because there are these negative externalities associated with density, they actually do need government. The problem is that governments often do far too much. So, in the case of land-use regulation, the land use regulation starts off in the 19th century with some fairly sensible-seeming things about, say, fire risks. Huge externality associated with having fire, some limitations about where you are going to put particularly flammable wood buildings is not the craziest thing in the world. But once you sort of start going down that path--and I'm glad that cities at least have footsteps to reduce fire risk--then governments are capable of getting involved in huge amount of regulations that are totally unnecessary and deeply counterproductive. And I think many localities have let themselves be conquered by various interest groups in making it far too difficult to build. This is true in suburbs, which are often capitals of NIMBYism (Not In My Back Yard). It's also true of many older cities that have made it very, very difficult to build up, that have covered great swaths of their territory in historic preservation districts that are essentially no-building zones. And of course the net impact of these things is that they make cities far more expensive than they need to be. And often create a certain amount of uniformity in terms of the income levels that are needed to pay for the high costs of housing in a city that doesn't build. Russ: What would you do about that? Guest: I would substantially ease the building process in most cities. I would drop a fair number of the height limitations. To the extent we think there are actual physical costs and measurable externalities associated with new building, I would proceed with a simple impact fee that one can actually justify rather than having a lengthy, opaque zoning process that does so much to limit new development. In the case of the city historic preservation districts I would probably replace the ever-increasing swatch of territories--15% of the land area in Manhattan south, in the bottom half of Manhattan excluding Central Park as an historic preservation district right now--and areas go into historic preservation districts but they rarely come out of them. So, it seems like it's going to be an ever-increasing swath of the city. I don't much like the idea of cities being museum pieces. There are a few which are appropriate, like Bruges, but I think it's good that cities change and that they develop new space, combination of new activities and people. So, I would in terms of preservation--my father was an architectural historian so I do really believe in the value of preserving some old, beautiful buildings--but I would have a fixed number of the total number of buildings that they are able to set aside as being preserved rather than allow them to just keep on getting new areas for preservation districts. And in general I would also get rid of most barriers to ex-used[?] development. There was a time when you didn't want to have the manufacturing activity right next to the residential district because of the negative externality associated with the factory or the slaughterhouses. But most of what we are looking at right now in terms of urban enterprise is fairly clean, fairly free of major externalities. So there's little reason to have barriers that separate commercial and residential usage. So I would get rid of almost all of that. |
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Podcast Highlights
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| 0:33 | Intro. [Recording date: April 4, 2013.] Russ: Topic is U.S. economy. I'm sure we'll get into a lot of other areas as well. You argue that we face chronic problems, but our solutions that we've been trying are very temporary. What are the chronic problems that you think face the United States and what should we be doing about them? Guest: Really, since the early 1980s we've seen a pretty significant structural change in the U.S. economy. It's been manifested in the changing labor markets, changing patterns of production, trade, finance. And a lot of ecological harms and disasters. And I think that it's when you sum all of that up, one can see that the United States, like the whole world indeed, is experiencing a lot of disruption, a lot of very difficult changes in all aspects of our economic and social life, and we've got a lot of undesirable consequences from that. My point is that we've not been attending to those long-term changes. We have hardly recognized them in our politics or our policies. And as a result of that we've ended up, in recent years, in a pretty deep macroeconomic crisis--high joblessness--a pretty deep social crisis, with very high inequality of income; and a shockingly high amount of poverty in the United States. We've ended up with dysfunctional systems in our economy. The healthcare system is really, compared to most other places in the world, not working. Our energy sector, our infrastructure, really are way off course from what we need. So, my view is that by failing to understand the deeper dynamics that the world, the United States are experiencing, the deeper trends of technology and globalization, and environmental change, we've just gotten farther and farther off track. And our political system seems only to understand the 24 hour news cycle or at best the 2-year election cycle. It doesn't seem to want to focus on these longer-term issues at all. Russ: We only have an hour, so that list of problems that we have was quite lengthy. Let's just take a few of them. What do you think are the most important ones that have been ignored, that you think are at least amenable to policy? Guest: I think the overriding change of the last 30 years has been globalization. But globalization has many different aspects to it. Of course, the world has really come together into one integrated, interconnected system of production, trade, finance, and technology. The introduction of China into the world economy has been probably the single most transformative aspect. But globalization has both enabled and been enabled by the information revolution. And so that has allowed jobs to shift across sectors and across type and across countries. We have a radically changed division of labor within and between economies. The growth of the world economy as a whole that's been made possible by this and by the change of policies has also put huge strains not only on particular sectors of the economy and on income distribution but on the global environment, because China is so large and the rise of the emerging economies is so rapid and so significant, that we also have planetary scale ecological challenges as well. So, I would, in a way, try to maybe a little bit oversimplify it by saying that a fundamental driver is a world economy that at one level has done quite well over 30 years--quite significant economic growth. But the integration of the world economy has meant huge changes in the nature of jobs, technology, and environmental problems. And again, those are the ones that we need to attend to. What we've ended up with is an economy that no longer sustains a middle class, that has huge inequalities between rich and poor, and that hasn't begun to face up to some very, very deep ecological challenges, which hit us the hard way in these superstorms, like Superstorm Sandy last November, or the massive drought that has been hitting the United States in the recent years and doing great damage to the U.S. food supply and the global food supply. |
| 6:24 | Russ: I want to stop you there. I want to get back to the economy, but you've emphasized a couple of times the ecological issue. And I want to get to that. On the food issue, it seems to me--and I'm happy to hear a different perspective--that the subsidies to the agricultural sector in the United States, particularly the increased encouragement of corn in the production of ethanol, has pushed up prices of many related commodities. That's one side of the commodity price issue. The other side of course is the demand side from growth from China, India, and elsewhere, which has pushed up prices of oil alongside geopolitical events, so it's very hard to disentangle those. But it seems to me that we don't have any kind of food crisis in the United States other than the fact that we have privileged one product in such a distortionary way, with very little environment return. Do you disagree with that? Guest: Well, no, I agree with both your points. The ethanol subsidies are absolutely crazy--except from the political economy point of view. The rising world demand for feed grains and food grains, especially because of China's growth, is a major factor. But on the supply side, globally, and in the United States, we have had an increasingly erratic supply of both the feed and the food grains. Not only the diversion into biofuels, which make no sense--as you rightly point out--but also more and more shocks. Last year because of this megadrought we lost something around a fifth of the soybean production, something comparable in our maize production. We're a central part of the total world food grain and feed grain system. So that was a major shock. In recent years there have been significant droughts in China, which did great damage to their domestic production, forced them big time into the international markets. There were significant crop failures in Russia and Ukraine. So what we're seeing is three phenomena, and I think you name two of them very well. One is a useless diversion of very valuable arable land into the wrong things, both in the United States and Europe, largely driven by lobbies. Second is a rising world demand for every variety of agricultural, and I would add fisheries, outputs. But third is an ecological constraint on the supply side, on the fishery side: we've really topped out the extraction from the oceans and done great damage to a lot of fisheries; on the terrestrial side we have tremendous instability of the feed and food grain supplies right now in a lot of the staple regions because of this phenomenon of the increasing variable, the heat waves, droughts, floods in a lot of places--Australia being increasingly destabilized as well. And so I think it's a combination of all of these factors. But they are all significant. And they are all playing a role and the manifestation of it most directly is very high real prices of these commodities, and of course, high volatility as well. But I think both the mean and the variance--high average prices that we now face and this very high volatility in recent years are reflections of these phenomena. Russ: The only other point I would make--obviously we could spend the whole time on this--is that I'm not a deep student of climate change, but I have noticed that there is murmuring that the last 10 or 15 years have not shown much global warming. And this seems surprising in light of the incredible amount of carbon dioxide being pumped out of China, and elsewhere, as the world has gotten more developed. Guest: I think that's not a right observation, Russ. Russ: Which part? Guest: The fact that the last 10 years have not been consistent with the modeling and with the expectations of climate change. There's a lot of silliness in that oft-repeated observation. The last decade has been the warmest decade in instrument history. What is true is that 1998 was exceptionally warm because it was a very strong El Niño year. So a lot of people that play up this--mainly for propaganda reasons, in my view--say, well look, 1998 was the peak and then if you draw the line from 1998, you just don't see all that much. But what we do see is that if you strip away these seasonal and inter-annual phenomena of the El Niño Southern Oscillation (ENSO) cycle, if you take into account the decadal ocean temperature trends and so forth, what we face right now is very, very clear. And that is a greenhouse gas-driven warming of the planet that is both highly significant, very dangerous, continuing at a rapid rate; and the best of our ability, scientific inference, very frightening to the future, with a lot of instability likely to arise. Russ: Do you think we have any precision about what the average global temperature will be in, say, 50 years? Guest: I think we have enough reason to believe that the increases will be so significant and we're running an experiment not on a small patch of the planet but on the only earth we have, that we have all the reason to take small measures now that are in conformity with the very strong knowledge and inferences that we have available. Russ: Maybe we'll come back to that toward the end. I would rather focus our time, though, on the economy. Guest: But it is part of the economy. Russ: Oh, I understand. |
| 13:24 | Russ: I want to come to the issues you raised about the U.S. workforce and its relationship to the global economy. I want to challenge you and have you expand on a couple of statements you made earlier. You said the middle class--I forget the exact phrase that you used, it was not a cheerful phrase: dead, gone, dying, missing-- Guest: Shrinking. I don't know what word I used, but let's go with 'shrinking' for our discussion for the moment. Russ: Shrinking What do you mean by that? I don't know what that means. I look at the economy, and the reason I find your work so interesting is that it's very difficult to disentangle the mediocre recovery we are in now from longer-term trends. And there is a temptation to say: We're just having a bad recovery. You are saying: No, no, no; there's something more serious underlying this problem. There's a sea change that's more than just the last couple of years. You are suggesting it goes back two to three decades. What's that sea change that's destroying the middle class? Because I don't see it. I see a sea change for people who didn't finish high school. I think a person who didn't finish high school today has a very different economic path than 50 years ago or 40 years ago or even 30 years ago. But that's a very specific kind of problem. You are saying something much more systemic. Guest: Well, at first a person who finishes high school but doesn't get a bachelor's degree is the median for a young man in our society, so we should keep track of what's a small thing and what's a modal phenomenon. For young people, aged 25-29, bachelor's degree holders constitute about a third of the total--I think it's maybe 35, 36%. That share has not really changed very much for quite a long time. Most of our young people do not get a bachelor's degree. Russ: They attend. More attend, but they don't finish. Guest: More attend, and many, many drop out before they complete the degree. The labor market experience is that the degree is important. The premium on that degree has increased significantly. If you do have a bachelor's degree or above, you are probably doing pretty well in this economy. But that is not the median, and it's far from the norm in our society. If you have a high school diploma or less, well, life is tough. And in many measures, it's gotten considerably tougher. Every measure that one could cite has its own school of debate of exactly what it means and compositional effects and other things to take away, but I would say that the highlights are that for men in particular, and I think there's a reason for that because men have been more exposed to the forces of globalization than women in the economy, who work mainly in the service sector and more often than not in non-tradable sectors. But for men the peak, median, full-time annual earning was in 1973. And one has to acknowledge that by any standard of our business, if you look at that, because our economy has been growing since 1973, pretty significantly and pretty consistently, actually, to see a median earnings of full-time male workers peak 40 years ago is a structural shock, actually. I find it amazing. Very counterintuitive. And very striking. But that's the case. And if you look at many other measures--every one of them flawed, so you have to take the aggregation of them to get a picture, whether it's wage levels or levels of earnings in various occupations--basically, for the middle of the income distribution and on down there's been very little measured progress. I think probably real progress is greater than what's measured. But all of the measured gains are in the top quintile, more or less; and a huge proportion of those are in the top 1%, we know. So we've had a tremendous widening of income inequalities by many, many measures. Top 1%, Gini coefficients, top 10% over bottom 10%, top 20% over bottom 20%--we've seen a lot of evidence of stagnation of earnings for those with high school or less educational completion. We see that the number of jobs within the current recovery, for example, for those with high school and less--there's been no recovery. There's just been a net job loss that had no rebound. The jobs for college grads has continued to grow, and there was a rebound; it was quite significant. So, I think this widening of the income inequality is very real. Sometimes the middle class is measured by proportion of households or workers within some range of the median: plus-minus 50% of the median income, for example. And the share of households within that bound has also declined, pretty markedly. Russ: But those numbers are very distorted by demographic changes--due to divorce, as the number of households changed over the last 30 or 40 years. Household structure has totally been revolutionized because of that increase in divorce rate; the delay in the age of marriage. So I think when you look at those data, you have to be very careful. Guest: Didn't I say that? Russ: Uh, not exactly. Guest: Well, I did. And not only I said that every one of these was--they are a community that debates the fine points, but I also said you have to look at the totality of this evidence, which comes in many, many different directions and for many different kinds of surveys and many different kinds of evidence. And my conclusion, at least, is that the evidence is strong and consistent that we've had a significant structural change, a widening of income inequality, a very particular effect at the top, and a quite significant effect from the median on down. Russ: Well, the question then is: First of all, I don't think the 1973 peak of male earnings is consistent with--as you point out--there is some growth. Maybe it's not zero. Maybe that really wasn't the peak. I think it's grossly out of line with what we see through all kinds of consumption measures and other ways we can look at it, the way the data are collected. Guest: Russ, I would tend to add the following. By the way we actually measure consumption in the national accounts and by the traditional Consumer Price Index (CPI) deflated standards, there you see a peak. What I don't think is right are these consumer price indices. I think inequality of goods, the advances of technology, the fact that we can do things now that literally were not possible 40 years ago don't get into our equality of goods measurements adequately. So, I think there's been progress. But as we actually measure things, no. Then it really did peak. Russ: Yeah, no doubt. Guest: So, that's my point. |
| 22:15 | Russ: I think the question then is: It's true that the top 1% has done very well. Do you believe there is a causal connection between, say, the top 1%'s success, which has many different components, as we've often remarked on this program--it includes Wall Street executives who I think have been grotesquely subsidized by taxpayer largesse in all kinds of subtle and not-so-subtle ways; there's athletes, entertainers, Chief Executive Officers (CEOs) of large companies that have been very successful and productive, entrepreneurs. A lot of those people have made the world a better place, and I'm thrilled that they are making a lot more money--doesn't bother me at all. But there are others that I think have taken money from the rest of us. But do you think that change in the top 1% has something to do with the fate of those in the middle and below? And I ask that because, although we talked about how hard it is to disentangle trends from temporary changes, when you look at this last recession you see a massive drop in construction employment. Which punishes people with relatively low levels of education. So we see a very tough secular trend downward in manufacturing employment due to globalization and productivity change. Those to me are the things that matter. Do you think the inequality in and of itself is doing something to the middle and the lower groups and the distribution? Guest: Well, I think that you are right to point to globalization and technological change as the main drivers of actually I would say most of this, even the top. And I regard those as very significant structural factors that we've not been paying attention to. That's really my point. So I'm in agreement with that. When it comes to the top, they've been big gainers in globalization; but for, actually, for an interesting variety of reasons. One is that globalization really has been kind to capital in general, whether human capital or financial capital. More outlets for investment, a larger globalization market, having high skills or a great brand or a great ability to sing or to put a ball in a hoop or in a cup has absolutely been aided by globalization. But so, too, has the political power by the top absolutely been enhanced by this as well. They can play governments off against each other. There is a race to the bottom in many ways of who you try to attract, who you appeal to in internationally mobile capital. Our own political system is skewed more to the interests, the views, the wellbeing of that group. And that has absolutely been played out in the way our tax system has evolved, in the absolutely grotesque and fulmant[?] tax abuses that have been permitted. And in the fact that Wall Street has run the White House for the last 15, 20 years. And ended up, as Wall Street does when it's allowed to run things, making a huge mess of things. So I think that there's a political economy aspect to the wealth at the top that goes alongside the economic aspects. The economic aspects are that globalization really does favor mobile capital; it really does favor human capital. It has been very tough for those in the middle and at the bottom because of globalization and the competition in the open sector of our economy. And of course, as you and I both said: Technology has been an underlying driver of globalization itself, and it also a direct part of the income distribution shifts within the United States even aside from globalization. So the summary is: I view it as a pretty complicated morass of basic economic factors combined with political economy. But it's added up to a political system which amplifies these differences rather than leans against the wind. Russ: On a cheerier note, you say it's bad for people at the bottom, but of course, I assume you mean here in the United States. Certainly the average worker in China, India, and a few other places that all have a lot of people, have done extraordinarily well over the last 30 years. Guest: I agree with that. And I would add Brazil as another large economy with big gains. You know, the world economy has done quite well in a lot of ways, and I'm a big fan of globalization. I think it has raised living standards and improved wellbeing. What I'm not a fan of is closing our eyes to the challenges that it leads to as well. And that's really my main point. |
| 28:01 | Russ: Before we leave that, and I want to turn to some more macroeconomic policy issues, I want to go back to these sectoral issues in manufacturing and housing construction. When people say--it used to be that if you finished high school you led a middle class life, and that's no longer true--I think that's correct. But my response to that is: It used to be if in the late 19th century if you were a blacksmith, you made a good living. And by the early 20th century that was no longer true. Certainly by the middle of the 20th century. People understood that. They had to go get different skills. It's certainly true that the manufacturing sector in the United States used to be a very good outlet for people with low levels of formal schooling. That's a sector that's diminishing. Housing has at least declined temporarily, maybe for a long time. What policy changes need to be put in place, or have to be put in place, if at all, to let the evolution of the job market deal with these technology changes? What do you recommend? Guest: I think you are making a great point and I agree with it. When you have underlying structural changes as we do expect, you expect changes in response. And then you really have to ask the question: Will these take care of themselves? And I think the complication fundamentally comes from the fact that the entire life cycle of human capital, from an early childhood which gives a chance to a young child, up through formal schooling, up through the costs of higher education, have massive breakdowns. And these are breakdowns that have been acknowledged for decades and decades. I think Milton Friedman was probably as eloquent as anybody about the breakdowns of normal market forces for human capital. What I see happening, Russ, is we have increasingly become a tracked society, where a child born into poverty today has a very, very different, very, very difficult mountain to climb if they are going to get out of poverty. The evidence is that most don't make it. And there are many factors in that quote, "within family transmission" of human capital, our absolutely insane policy of locking up a whole generation of young minority men, which has led to this incarceration boom which is breaking our society, especially in African American communities. The great problems of broken schools, gangs, neighborhoods that don't function, kids that by the age of 4 or 5 are not school-ready and never catch up. Jim Heckman's evidence on that is extremely powerful in my view. And then the soaring costs of higher education, which maybe we're going to see a technological breakthrough to get out of with online education--I dearly hope for that. But what we see is very large cohort of young people responding to the market, trying to get ahead and falling short. They go to college for a year or two, take on a lot of debt; and then can't make it. And so now we've got a trillion dollars of student loans, a huge amount of that is going to go into default; it's going to be very painful for a lot of young people who made a year or two of school but couldn't continue. And we haven't solved this whole lifecycle problem of human capital. It used to be easier. Of course, it used to be you weren't aspiring to a $50,000, $100,000 a year job. You were aspiring to be a trained blacksmith, like you said. And that was an easier road to hoe. But now we have very profound challenges of human capital accumulation because we want to live in a sophisticated, high-income society that requires lots of skills and a healthy upbringing and labor-market-friendly capacities. And for a significant part of our population, our young people, it's not happening. And I see that as a huge, probably the biggest investment failure of our time. And also as a social calamity. Russ: Yeah. It's an infrastructure failure we can both agree on with both how tragic it is and how difficult it seems to be to do anything about it. Guest: I wish we talked about it more in a substantive, honest, evidence-based way than we do. And I wish we took the fact that because of technology and globalization we've had a problem that's been growing for a long time, that we would actually face up to this. And it's interesting, I take a view on one piece of what you said--maybe it's a good segue to the macro--that is a little bit different from others. We had our housing bubble and collapse, and the housing bubble provided jobs, not huge numbers, but provided jobs-- Russ: Millions-- Guest: That went away. And I view that not as a business cycle but as the last hurrah of trying to do anything to employ people who otherwise weren't going to get employed, through easy credit policy. So I view the boom in the housing market basically as the Fed's fairly pathetic response to this deeper structural problem. In other words, we've had a weak labor market for quite a while. And the only way we've been able to address it is by pumping in a lot of money, into housing. And of course that leads to a bubble, and it leads to a collapse, and it's a very short-sighted policy. But the Fed, which is a very short-sighted institution, has simply looked at the labor market, said it's weak; and therefore it's our mandate to lower interest rates, put the pedal to the floor, pump up liquidity. And so we get these housing bubbles not because of mere accidents or deranged regulation, though that's part of it. We get them in part as a macro response, a policy response, to this underlying structural challenge. Which we didn't want to discuss. And so the only way we end up discussing it is through monetary policy. Russ: Let's stick with this education issue for another minute, because I think it is important. Let's have a few minutes of substance on it. I would just add that the technology revolution in education, which I hope is coming, I hope, is going to create a lot of inequality in our profession. There are going to be some very successful people who can master that technology, who can reach a much larger group of people, make a lot more money; and there are going to be a lot of academics who are going to have trouble making a living. Which probably is for the best. Those of us who can't reach large audiences will have to find something more productive to do. Guest: Well, we're going to be like the music industry. Exactly what's happened there as well. A few bands make it, and lots of others have their music heard but they don't have much of an income. Russ: Yeah. But for people who love music or are intellectually curious, it's a great time to be alive. Guest: I think that's right. And I think for education we can have a boom of access. But it is going to be pretty disruptive. |
| 36:41 | Russ: Let's talk for a minute about that education issue, the world we are in now, these changes we hope are coming. The world we are stuck with at least for some time. Especially at the K-12 level. I live in a suburban Maryland town with phenomenal public schools. There's a bunch of them out here: Bethesda, Potomac. Schools are great; public schools are great here. You go into the city, they are awful. And you asked for an evidence-based discussion of this issue. It's hard to do. Because we have family issues, we have cultural issues. We have teacher-quality issues. Very hard to disentangle. And we have a system that's unbelievably inflexible, on every dimension. It's still 25 kids, 40 kids, 18 kids sitting at desks, doing stuff with a teacher in front of the room. We don't have an apprentice system. We don't have a technical training system. We have a fantasy that: Oh, if everybody could just learn science and math and engineering, technology, we could all be rich. But not everybody can do those things. How do you--my preference, of course, is to get the government out of the business of educating people and let the private sector and voluntary activity--I think we could do a better job. But I doubt you share that view. So, what would be your recommendation for how we evolve, or at least move forward, given these challenges? Guest: I think the first thing I would like us to do is to look at some of the international experience more closely. Because I think there are a lot of very interesting lessons of success stories that we could benefit from. I'll mention two. One is Germany, of course, which is now rightly famous for standing out, not quite alone but as part of a Northern European distinctiveness of low youth unemployment. They have a tradition that goes back, actually to the Guild Age, of course, of apprenticeships. But they've thought very hard about the school-to-work transition. Starting from what should schools do, what kind of skills are needed, what is a true vocational skill track for skilled craftsmen, which is a skill very much a German tradition. And then they have public subsidies to enable companies to take on very raw, early apprentices. And many of those apprentices, which are part of a formal program, then turn into long-term jobs within that company itself. And others just have given the ground-level experience to young people to understand what the labor market is. So, to my mind that kind of active labor market policy is smart. It's complicated, and it's not what we have. We have kind of an industrial machine which probably worked in the industrial age, where you churn out kids to 10th grade or 12th grade and then there was a market for them. And that's not working now. The second, I think, is very important, is Finland. A wonderful book that I recommend is called Finnish Lessons, about Finland's kind of self-realization that they were at the top of the world's charts on these Program for International Student Assessment (PISA), international standards tests. And they don't even test there. So they went into their own internal analysis: What did we do to get to the top of these standardized results when we don't even have a culture of testing? The point there, which is almost at the other end of the extreme here--and I don't want to oversimplify this but I think it is at the core--is that Finland as a homogeneous society with a tradition of social, socioeconomic, and religious homogeneity, has an incredibly strong ethic of equality. And the view--this educator, who was one of the lead education reformers in Finland, writes in this book, Finnish Lessons, is that the starting point is the idea that every kid in Finland needs a decent start and a decent education. They kind of worked backwards from that fundamental premise into the design of their schools, their school systems. They are strongly unionized, by the way; but their teachers are held in extremely high social repute. They are the esteemed members of society. But there was a real norm of equality. Now the United States has absolutely no such norm. We ran away from it, especially over the last 40 years. We have the most tracked differences, how rich families want their kids to be educated, and that's largely in private schools; and how average families in the middle have their kids educated, are just completely different things. So we see that difference, but there's a huge resource difference involved, and I think it's really looking at how do kids of the top 1%, what kind of schools do they go to, how much does it cost to educate them, and so forth. What happens for the rest of society is completely different. But then I think there are obviously these very deep social realities in our country; but they are not just fate. They are partly our public response. The African-American community has been devastated, in my view, by the way we have engaged in the so-called 'war on crime', from the late 1960s onward. We've had an epidemic of incarceration unmatched in the entire world; and now we're into the second and the third generation of kids growing up without fathers, and with 2 and a half million young people behind bars. It's mind-bogglingly wrong headed, and it's a big part of the problem that isn't discussed. It's also fueled by the worst incentives imaginable. We have privatized the prisons; and the prisons actually lobby for customers--customers that the state system gives them. And they are perfectly aware of what great business it is to lock up a kid because he's been caught with a joint and to keep him behind bars for years. That's business. And so every time we privatize something, we also create a lobby around it. That's part of the political economy. And we also ought to think about that side of it as well. Russ: We did a podcast with Becky Pettit on many of those issues. I do think it's more than that. I agree there's some bad political economy there. We have a war on drugs that has been very expensive, with very little to show for it other than putting a lot of people in jail. Guest: Yeah, nothing to show for it, I would say. Russ: And enriching police bureaucracies and some other, as you say, profiteers, people who make money off the system, that's not really accomplishing anything. But there's also family structure issues that go beyond the African-American community that are correlated, I don't know what the reason is, with low education. A lot of people growing up without two parents in the home, we have a culture that says that's no big deal. At least a public culture. Whether that's true or not I think is the great experiment we've embarked on over the last few decades, that's tangled up with a lot of things we're talking about. |
| 45:27 | Russ: Let's move to the macroeconomics, because it's an area that it would be nice to agree with you on. You've been very critical lately about an area you call 'crude Keynesianism'--in particular the evaluation of stimulus spending of 2009 as well as the significance of deficits and the size of the national debt. And you've taken quite a bit of heat from some people who share your ideology overall but don't like this. So, talk about what you mean by crude Keynesianism, why you think it's wrong, and is there a Keynesianism you want to defend that's not so crude. Guest: Well, since I start from the premise that we have deep, structural, long-term issues, my view of the role of government and public investment and the budget is about providing public goods as I understand them, and the things we've been talking about, whether it's infrastructure or skills or research and development (R&D) for renewable energy to combat climate change. I want the government there to do the things that the private sector doesn't do for all sorts of reasons. And view public economics as a benchmark for that. Now of course we could have a debate about every one of those things. We've discussed some of them. And I take, generally, a fairly expansive view of what I think government can and should do to address some of these deep structural issues. Where I part company with some, say, government-friendly advocates, is that, since I take a long-term and structural view of these problems, I don't think that short term, aggregate demand management is really the point of most of what we face. And the 2008 financial crisis was for me kind of the epitome of this parting of the paths with a lot of people, because when the bubble burst, I said: Well, my view is that the housing bubble itself was a symptom, not a cause. Of course, it was a cause of the immediate cycle-- Russ: A proximate cause. Guest: It was a proximate cause, but it was not a deep cause. I view Alan Greenspan as an endogenous politician, to a deeper set of issues; and I viewed the easy money policy of the Fed as an easy, unwise political response to soft labor markets in the early 2000s. Soft for deeper reasons that we've been discussing. So, pumping up the housing market I viewed as just an endogenous policy response, not a cause in and of itself. Not a prime mover of the crisis. But when President Obama came in and Larry Summers became his top adviser, and Paul Krugman, and others were rallying, they basically took the view, in my interpretation--which they don't find very charitable--but I thought that they took the view: Let's recreate the bubble. What do we know how to do? Well, we get people employed by construction. We get people employed by putting them back to work selling consumer products and so forth. I thought it was pretty unimaginative, because it didn't ask the question: How did we get to 2008? They just said: Well, it's a business cycle, and now that unemployment is high we have an aggregate demand problem and let's stimulate the economy and put people back to work. And I was rather shocked actually, because Obama came in, of course with one of the great messes of modern times. And the budget deficit, because of the cyclical reasons, and the Troubled Asset Relief Program (TARP) was already above a trillion dollars. And if I were in that position at that point, I would say: My God, I inherited more than a trillion dollar flow deficit, we've got huge challenges ahead; we've got to take some small steps to get this deficit down. We shouldn't do large things because we do need a bit of automatic stabilizer right now, but let's head in the direction of getting this deficit under control. But they did exactly the opposite. They doubled down on the deficit. We don't know the counterfactuals, but maybe raising it from $1.2 trillion to $1.6 trillion, say, in 2009. I was shocked. Russ: And keeping it for a few years. Guest: And then every time there was an option to start moving it down, until recently--I know the White House view, because I was discussing it with them often, was: We need another year of stimulus. We need another temporary tax cut, another payroll tax cut, an extension of the Bush tax cuts, and so forth. None of which I agreed with because, you know, from my philosophy I wanted more revenues to fund public goods and at the same time to reduce the deficit because I think that this buildup of debt just builds up lots of problems in the future. Russ: Let's talk about those. Because I think--well go ahead, you can finish. Guest: And the crude Keynesian part of it, in addition to what I regard as a misinterpretation of this crisis, just calling it an aggregate demand business cycle, basically, is two other things at least. One is the feeling that macroeconomics is just turning a dial, and fiscal policy has a multiplier on the spending side of 1.5 and on the tax side of 1, or whatever it is, and that's good enough and those are reliable multipliers and we can count on them. And I just find that view wholly unpersuasive both on a theoretical and on an empirical basis. So I didn't believe that those dials were there to turn. The second aspect of the crudeness of the Keynesianism was the constant dismissal of the harms of building up public debt. And of course that continues to this day. But this is part and parcel of Keynes's famous quip, which I don't think even he believed and it was just too good to pass up, probably--the one that 'in the long run, we're all dead.' In the not so distant future we are going to have a massive amount of debt on our books that is going to have to be serviced, and that's going to create its own fiscal challenges; and since I'm so interested in public investment and public programs to solve problems, I just see that debt as crowding out things that are going to be important in the future. And for Paul Krugman to just blithely say, Don't worry about it--as the public debt goes from 37% of Gross Domestic Product (GDP) in 2007 to 75% of GDP today, and on his favorite trajectory would continue to grow into the 80-90% of GDP--I said: Come on, Paul! We've got things we need to do with government revenues other than servicing debt in the future. And that's why I view that as quite odd and quite wrong-headed. Russ: Well, I think his response would be--he'd say two things. Well, he said two things. One would be: Well, look at Japan. They are way over that and they are not dying. And number two, interest rates--I hear this all the time, and it doesn't make sense to me, but I'll let you respond to it--are so low, it's cheap, it's almost free, it's practically free; why are you worrying about it? Guest: Well, if we were financing a long term project at very low interest rates on a long term debt, I think there's probably an argument there for certain kinds of investment programs. But if we are financing our general government budget deficit, taking pains by the way through public policy of the Fed to shorten the maturity of the public debt and at the same time with every reason to believe that interest rates will rise back to normal levels in the future when the Fed's (Quantitative Easing) QE1, QE2, QE3, QEn policies finally stop, I think it's just a matter of looking ahead a few years. And the Congressional Budget Office, (CBO) does look ahead a decade in its scenario and it says interest rates are likely to rise by the end of this decade from near zero today to maybe 4 or 5 percentage points on short term debt, on average high enough to drive the debt servicing from the current level of about 1.5% of GDP up to something like 3.3%, 3.4% of GDP early in the 2020s. Now, going up to 3.3, 3.4% of national income in debt servicing is not very attractive to me. Because that would mean on the current CBO baseline that we would be spending more on simply servicing the public debt than we'd be spending on the entire sum of civilian discretionary programs for jobs, for education, for infrastructure, for environment, for climate change, for science and technology. And I don't want to do that. And since we all have Excel, we can make these calculations and say we don't have to do that. We should be more restrained on our borrowing so that we don't get into that trap ten years from now. |
| 55:57 | Guest: And I think Paul Krugman has really done a bit of a disservice by saying that the only test is whether we are going to have a financial market panic in the future. Russ: Right. I think that's a bizarro standard for whether it's a good idea or not. Guest: Exactly. Because the most basic point-- Russ: It's all free. Guest: Yes. The most basic point of intertemporal public economics is that you have to service your debt in the future. You don't have a Bernie Madoff scheme at hand, you don't have a Ponzi scheme at hand. You are going to have to service this stuff. And that's going to require revenues and those revenues are going to face political resistance; they are going to crowd out other things; and they are going to be distortionary. So, just building up debt has a cost. If you are doing an optimal control to your budget, you have a shadow price to building up that debt, and if you do it in a more straightforward way, you have to pay for it. It's not free. And a good metric is that you have to pay for it in present value and that means taking on a dollar of debt you are going to have to raise a dollar of revenues or cut a dollar of spending or do some combination of the two in the future. And you better think ahead about that and not be so blithe. Now, of course, there's another voodoo side of this which is the voodoo left that in my view which is in my view no less or more meritorious than the voodoo right--which said, cut taxes; it pays for itself. Well, the voodoo left says: spend more money; it pays for itself. And to my mind these are both examples of profound wishful thinking that are naive, counter to experience, and invite abuse. And so I don't like them on either side. Russ: They are both perpetual motion machines to an extent that promise something that is so deliciously seductive but doesn't seem to materialize. |
| 58:03 | Russ: One last comment on the Keynesian part and then we are going to have to close so I want to get some quick comments from you. You said that the stimulus story, the dials that you can't turn because they are not there--I'm very sympathetic to that view, being a Hayekian. But you said also that the empirical evidence isn't there. I've come to believe that it's hard to assess the merits of these claims on either side, both the skeptics of these claims, like my own view, or the people who claim that they know what the multiplier is. The CBO can't really measure what the effect of the stimulus is. They admit they can't construct the counterfactual. We certainly are in a different regime of policy and financial sector stability. What's your view on vulnerability[?]? We can understand the connections between the dials, or the non-connections, and the rest of the economy. Guest: Well, first, we're operating in a complex system so it's not hard to see why we can't understand these things with the precision that is sometimes pretended. Second, many people are confused by the frequent CBO reports that says the stimulus has created x million jobs. Russ: Those are lies. Guest: They don't understand that what that is is simply running the CBO model. It's not any outcomes at all. At all. But it gets quoted so frequently, and misunderstood. So I think it's worth bearing in mind. Third, I would turn to the theory. The theory says that temporary tax cuts and transfers shouldn't be expected to have much of an effect. And one of the things that I really disliked about the stimulus--and it's many things that I disliked about it--was that it was overwhelmingly temporary tax cuts and transfer payments. Exactly the kind that even in theory you wouldn't expect to have much of an effect. Because the theory says you should smooth that stuff. Getting a payroll tax cut for a year, it's some kind of income, a tax cut for a year or two, that's not going to do very much, and it shouldn't do very much, for your spending decisions. So I think on a theoretical basis I was very skeptical. I thought the content of the stimulus was what you would expect to come out of a back room of a Congressional Committee, basically the Democratic side of a Congressional Committee, in six weeks. Which is nothing very sensible for the long term. So that was a third point of my skepticism. Fourth point was of course the forecast didn't work. And as a Bayesian I take that as a sign that something is probably wrong in some of the linkages of this standard view. And what didn't work was the idea that we would be back to low unemployment, small budget deficits, and rapid growth already by 2011, 2012. And so whatever the others say, their forecasts didn't work. And they of course respond: Well, many other things intervened and if we hadn't done this, of course the stimulus didn't work exactly as we said it would but other things happened and that's why we didn't get the full effect. But I think that's not a very persuasive argument, actually. Russ: It's what Nassim Taleb calls the 'narrative fallacy.' He's right. I just want to apologize--I said that the CBO estimates about the job creations were 'lies.' That's not quite true. They are very honest about the fact that they just took their model and ran it again with the actual numbers of the stimulus amounts. They just took their forecast and re-ran it with the actual numbers and called that their estimate. Guest: What's [?] though is how no news outlet--I shouldn't say. The mainstream news just reported that straightforwardly. Russ: That's the lie part. Guest: The stimulus created so many jobs. That's shocking misunderstanding. Russ: That's what I meant. When I said lies, it's the pundits and news reports that took those as if they were something vaguely scientific. |
| 1:02:34 | Russ: To close, how has this very dramatic economic set of events we are talking about, which have probably grown, and your appreciation and understanding of it has probably changed over time and gotten richer. But for many of us, myself particularly and I'd like to know if it's true for you, this set of events forced us to think very differently about the way we think about economics. Has this changed for you? Are there lessons you've learned from the Crisis that you think are central, and do you think the profession has yet to learn? Guest: I don't think the profession is in very good shape. And I think of course our profession is hard. In some ways, actually, although people will object to this, it's harder than math and the natural sciences. Because we're trying to take aim to understand not only a complex system, but a complex system that is changing over time. Whereas at least a cell biologist is basically looking at the same phenomenon year in, year out, decade in, decade out. And that cell, while it evolves very slowly, it doesn't evolve at the same rate that the complex global economy does. So, my feeling is we've got a very hard job to do and we don't do it well. And I think that this recent few years has exposed the shortcomings more and more. It's led me to the view which I think I had, but I feel more strongly--that we really need to focus a lot more of our time and understanding on change: understanding long term, structural change. This is what makes our field hard, actually. If we were really in a stationary economy, meaning that the probability distributions were relatively unchanging over time, we'd figure this out. My view is that what makes this hard is not only the complexity, which makes statistical identification hard, counterfactuals hard; but what makes this especially hard is that the underpinning, the substrate of the economy is changing over time. So that our equations are never right. Because structure is the deepest part of our change over a period of ten or twenty years. And if we don't understand that in a more substantive way, the idea that business cycles are just simply overlaid on this and we have a kind of stationary theory of business cycles is also wrong. At least since my interpretation is that we're living in a mix of these two different temporal experiences--the longer term and the short term overlaid and interacting with each other. I love the field, this is my 41st year in economics, so that's a lot, and I've not regretted one day of choosing this as my life's work. But I wouldn't say that we're at a healthy moment as a profession right now, and we should take some lessons from this and figure out how to take a strong, theoretical set of ideas which are very, very good but don't define the world because they define too many worlds, too many possibilities, and link them more adequately to evidence, and a richer set of evidence and a better way to do the empirical work. And I think that this latest episode in broad public view has really exposed a lot of the weaknesses of the profession as it is right now. |
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| 0:33 | Intro. [Recording date: March 21, 2013.] Russ: Your new book, The Bankers' New Clothes is now one of my favorite books on the Crisis, and I've read quite a few. What the book does is it takes you step by step through how debt works, for an individual, for a bank, for a nation. And one of the things you learn even if you know something about debt is that debt is tricky. You talk a lot and very clearly about the incentives that debt creates, the side effects of debt, the fragility of debt. So if you find balance sheets confusing, or 'equity' a scary word, this is a great book for you. And even if you already understand these things, you'll get a better understanding. So what we're going to do is we'll go through some of the basic ideas of the book to start with in the podcast, and then we'll get into some of the policy applications that you also deal with in the book. So, I want to start with what a bank is. Now, a commercial bank--and you use the example in the book of the Bailey Savings and Loan from It's a Wonderful Life,--what a commercial bank does in its simplest form is it takes in deposits and it lends out that money to people who don't have enough. So, people who have extra money, savers, put that money in the bank. The bank then lends the money to people who don't have enough, say, for a downpayment or--excuse me, not for a downpayment but for cash to buy a house outright--they need to borrow some of the money. So what a bank does in that simplest of stories is they are just an intermediary. They take my money as a saver--and then I become a lender to the bank. The bank then lends that money to someone else. And I don't want to have to find those people. I don't want to have to find people who want the amount that I want to lend. I don't want to have to vet and check the credit risk of the people I would lend to. So in that story all a bank is is just an intermediary. It finds borrowers for the lenders who put their deposits in the bank. And of course the bank makes a profit. It takes a little bit from the borrower, a little bit from the lender. That makes sense. I'm still better off; I still get interest on my deposits. The person who borrows for the house still has to pay his own interest back, but not as much as they would if--or at least get to buy the house. There's competition among banks that keeps the spread--the amount that they borrow at and then lend at--small, to cover their costs and a little for profit. And that should be the end of the story. Banks are just intermediaries. But it's not the end of the story. Why are banks fragile? Why does that simple business model of transforming my loan into someone else's loan, my savings into someone else's mortgage--why does that become complicated? Guest: Well, they have fancy ways to talk about banks, and we try to unpack those. They talk about maturity transformation, liquidity transformation. What that means is really that the depositor, the people who lend to the banks, often time want their money quickly, especially demand deposits. But when they invest it, they kind of invest it longer term and in less liquid things. So there is a sort of imbalance between the money that they use to fund and their investment in the sense of the length of time until something has to happen and also the speed with which they have to pay versus get paid. And so that mismatch creates fragility by itself, which also means for example if all of us run to the bank at the same time then the bank may not be able to cover all of that. Even if it technically would be solvent, it has everything, that's kind of an inefficient run that you could have, in principle. So basically the banks tend to run a little bit more than other people into liquidity problems. You could say that, just, I have the money but I didn't go to the ATM kind of thing--I can pay you back but we're going to have to find a liquidity solution, sort of a rolling back my debt. Their funding is kind of fragile almost by definition because of the way it comes and the way people can come back for their money on short notice or any time they want. So that's part of the funding. And the investments are not as liquid or longer term than that. Russ: But of course as a depositor, in the absence of deposit insurance, if we imagine a bank just coming into creation but in the abstract, in a world that doesn't exist right now but did exist in the past. In the past, when I put my money in the bank, I was aware of the fact that it could go broke. There might be not enough assets backing up my deposits, so that I might not be able to get my money back if I didn't get in line early enough. So, how did banks, in the pre-deposit insurance days, how did banks reassure people that they would get their money out when they wanted it? Guest: Banks, way back before there were a lot of ways they were supported to pay back their debts, such as deposit insurance and other lenders of last resort-- Russ: Access to the Federal Reserve [the Fed]-- Guest: Right, the Fed and central banks, they had a lot more equity. And their equity funding, the owners' equity, didn't even have limited liability. The owners were personally liable. It was like a partnership, a private business with unlimited liability. And that's what depositors needed to trust the bank with their money. So, in the 19th century, it was 40, 50%; it kind of started declining, and as banks became only limited liability, really in the United States, after deposit insurance was introduced even through the Great Depression, there was increased liability for bank owners and at much higher equity levels, it still wasn't enough in the Depression. And then there were basically still losses, even with bankruptcies of owners, they were not [?]. But yes, the banks used to have a lot more equity. It may not have been enough, and banking was fragile for other reasons. So our view is it was never fully efficient. They always wanted to live slightly more on the edge than was efficient. But they certainly had a lot more equity than they have now, and that was kind of the way that depositors had to have it or they couldn't really trust the bank. |
| 7:18 | Russ: Now we could spend the rest of the hour very carefully as you do in the book looking at what equity is, how it works, how different levels of equity affect returns, riskiness, fragility--and again, I really recommend the book for that. It's not as riveting as Stephen King--I'm not a big Stephen King fan, so I'll say Charles Dickens. It's not as riveting as Charles Dickens, but you will get a lot smarter when you are done. It's not boring; it's not dreary. It's just steady and straight and clear. But in the meanwhile what I do want to talk about is this word 'equity.' So, let's try to--as you point out in the book, one of the biggest problems with talking about this is that people can confuse capital and equity. And they use them interchangeably. But let's talk about equity first; and then we'll talk about why that confusion arises. So, if I am a bank, and I get together with a group of people and I want to start a bank, in the old days before deposit insurance, I couldn't just say to people: Hey, put your money in my bank; I'll give you 3% interest, and I'll be lending it out--that's how I'll be raising the money to cover your interest because I'll be getting these mortgage payments back; let me cover that interest that I'm going to owe you; and so, just give me your money. People would rationally say: Well, what if some of those mortgages go broke? Or: What if a bunch of people who lend you money, put in savings, suddenly want it at the same time? And since bankers knew that, and depositors knew that, to get people to lend to your bank, to deposit money in your bank, you had to have your own equity tied up with it. So let's take an example of 50% equity. So, with 50% equity, I would collect a million dollars from depositors, say; I would put up a million dollars of my own money, or the partners in the bank--before limited liability we would each put up enough money to raise a million of our own; we'd take a million from depositors. And that would give us $2 million that we could potentially lend out. And if we lent that out, let's say, and all the lenders wanted their money back--or a better example would be, a bunch of the mortgages went broke, say, half of them, so I had half as much money coming in, I'd still have enough money to pay back my depositors. Correct? Guest: That's right. Russ: And if I had, say, 30%--let's say I took in $700,000; well, let's try and keep the numbers the same--$1.4 million in deposits and I put up $600,000 of my own money, the owners of the bank--then we'd have 30% equity. Thirty percent of the total assets and liabilities of the bank would be coming out of our own money rather than borrowed money from depositors. Why would that be better than the current world? Guest: Well, in the current world they don't have anything like the numbers you are talking about. You are talking about 30, 40, 50% equity. The numbers that banks have right now are in the single digits, and sometimes very low single digits. And you don't have to look very far to see that. Look at the crisis in Cyprus right now. You have banks in Cyprus taking in a lot of deposits from all over--from Russia, too, and their own people. Actually, as it turns out, promising to pay them 4 or 5%, which is above a market riskless rate. And so how were they trying to deliver that? Well, obviously they had to take risks to try to deliver 4-5%. However, they had almost no equity to speak of. Very little. They may have even been in compliance with the regulations that are so insufficient and flawed. And we can talk about that later. But right now, when they incurred losses, there is nowhere to turn. And they all of a sudden need a bailout to somehow tax their--or whatever they call it--to default, basically, on their depositors. Russ: So, in the recent crisis in the United States and other parts of the world, of which Cyprus is just the latest variant, as you said, equity as a percentage of total liabilities was not just single digits: typically less than 3%. And I think it's important to remember--we've talked about this on the program but it bears repeating: For every $100 that I invest as a bank, if $2 of the $100 is mine and $98 comes from borrowing--and it's not just depositors, the way we think of savings; these are people who lend money. And the only important thing to remember is that a borrower is somebody who gets a fixed return. They don't share in the up-side. They only get the down-side; and they are promised a fixed amount on their bond. Guest: A legal promise. Russ: It's a legal promise. So, if I put in $2 of the $100 myself and $98 comes from borrowing, which is a 45-to-1 ratio--now that's very normal, unfortunately, in the modern world. That means, and this is the cool part--not so cool, it turned out--that means that if the assets that I invest that $100 into, if they depreciate, if they fall in value by more than 2%, that means that the implicit collateral to pay back those loans is now worth less than the promises I've made. Guest: Underwater, basically. Russ: I'm under water, and I cannot keep my promises. And I'm bankrupt. Guest: Well, you might not go bankrupt quite, because you might not default. You might be insolvent but not bankrupt yet. That's exactly where the sort of blurry line comes in for the banks. They might remain in the state of insolvency. We've seen that and in fact we probably see it around us, that they somehow manage to live but they are actually very distressed or insolvent, very weak. |
| 13:46 | Russ: So your solution, and it's one I would be happy with--we'll talk about some different solutions later--your solution, then, is if you want to have a stable financial system, it's pretty straightforward. What do you have to do? Guest: Well, you need to reduce dramatically this indebtedness and you need to increase dramatically the reliance on equity funding. Which is basically the way other corporations in the economy fund for the most part, without having to regulate them. Russ: Now, when we talk about equity funding, earlier in our little example, the bank example, was the owners put up their own money. That's one form of equity. Of course, you can also issue stock. Guest: Corporations, yes. Russ: And that stock is a different kind of promise than debt. Stock is: You share in the future profits of the company, but there's no guarantee, no fixed amount you are promised. It just depends on how probable or unprobable the company is. Guest: The point about equity is there isn't really that promise. There is the upside, but you only get that after you pay your debt. The equity has returns and it has risk and the return is supposed to be compensating for the risk on average. And that's how these markets work. The economy funds itself with plenty of equity all the time. Among the best way for corporations to grow and invest is first and foremost to invest their profits. That's equity right there. It is basically if you have a good thing to do with the money--that's how Warren Buffett funds some of his investments; he never pays them out. He just keeps investing. Russ: Or you could issue stock. Guest: Yes, or you could issue stock. In other words, corporations do not need to borrow in order to invest. And many of them don't. They do some borrowing, and there is some [?] to borrowing, or maybe we can tell some stories. But basically equity is a fine and useful way to fund, and in the United States we have very nice, working equity markets that most corporations, especially the publicly traded ones, use happily. Russ: So, the claim then-- Guest: Except the banks don't like them. Russ: The banks don't like them. Now, that's the fascinating question. It's sort of the centerpiece of your book--the bankers will claim: We're different. We're not like Apple Computer. Apple doesn't borrow any money; in fact they are sitting on a lot of cash; and that's part of their equity. And the bankers say: No, no, you don't understand. Our industry is different. And if you make us have higher equity levels, we won't be able to do our job. That's their claim: We won't be able to be as effective; it's not efficient for banks to have to have the high equity levels that other corporations have. Is there any truth to that? Guest: No. It's just the types of things they would say if you press them on this vary from absolutely nonsensical to just flawed, in the context of the policy. Basically, they don't like equity for reasons that we explain in the book. There are a number of forces that make them not like equity. But when you step back about how we want them to fund, there is absolutely no reason that they should not fund with a lot more. And they would be a lot more productive for the economy and a lot safer. So, everything you can think about with them funding with more equity just removes distortions and corrects distortion and everything about it is like 10 good things. And everything that they say that's bad about it is just the way that this particular funding works from their narrowest perspective, from where they are right now and given the subsidies they are given when they borrow and the way they are compensated--all these things that have nothing to do with their ability to function or their ability to do things that are appropriate, in a cost design[?] economy. |
| 18:00 | Russ: High levels of leverage--that is, high levels of debt relative to equity--it seems to be good for bankers, but not good for banks necessarily. Or the rest of us. Guest: There are very few people who benefit. It's almost like they are addicted to it, and it's almost like we would help the industry, except for the subsidies, which maybe they pass on but there is not a huge amount of evidence that they do, but even if they do, it's distorted; that somehow if you correct that, that something would be bad. It starts with this confusion that you kind of hinted at, and you almost slipped into saying 'hold' capital, because that's how they use the word. And that sort of sends you to the wrong side of the balance sheet. Because it sounds as if what we are talking about is cash reserves. And some people would tell you that we are talking about a rainy day fund. But that's not what we are talking about. It's not about cash sitting idle. It's about the way you fund your loans. Russ: So, people, when they hear the phrase--and I have to confess, I used to misunderstand this as well; we did talk about this in our first podcast together. And I've gotten a little bit smarter since then. I've read your book, I've thought about it a lot more. Someone it makes more sense to me. But the idea is, when you hear the phrase 'higher capital requirement' it makes it sound like you have to set money aside in case your, say, assets lose value. Guest: It's not cash. Russ: Right. But that's not what it is. Explain what it is. Guest: It's just basically your assets minus your liabilities. The amount that's not committed to borrowed funds, as a fraction of your assets. That's equity, basically. Capital [?] is a whole other can of worms; it allows some other things to be counted as loss-absorbing. But it's meant to be the part of your funding that can absorb losses. Russ: So, for example, if we required in the United States or other countries required their banks to have, say, a 25% equity requirement, that is not 25% of your assets have to be set aside. It means that for every $100 of investment you make, $25 has to either come from your own money or money you raise through stock; or cash, if you have it. But it doesn't mean it's sitting around. Now, I think the key for me--and tell me if I'm wrong--the key for me in understanding this is that the reason bankers like leverage--obviously isn't what they say, which is: The money would be tied up if we have equity. Guest: Taken away from the economy, they tell you. They say it's socked away, taken away from the economy somehow. Russ: That's clearly-- Guest: Nonsense-- Russ: --not true. What it seems to me is true, and I think this is the reason they don't like it, is the bank would be smaller. Guest: Well, if that's true then it's only because right now it's too bloated with subsidies. Because really the only way it would be smaller, the total funding of the bank would only increase by the removal of subsidies that are associated with equity. So that's all. If the size of the bank or the banking industry would go down, it would go down to the right size. Russ: Right. To me, smaller--that's a feature, not a bug. Guest: So from their perspective, they might be compensated in such a way--and there are many ways in which this manifests itself--but the ways bankers themselves are compensated encourages them to rely more, to magnify the upside. And we go through that in great detail. And they only want to think about the upside. And of course, with more risk comes more return on average. Maybe they don't even compensate their equity holders enough relative to the risk. But obviously the smaller the base, the higher the magnification on the upside. And also the average, because risk and return are tied. So they like the upside and they can live in that world. And in addition, their borrowing is subsidized so they get to borrow at slightly lower rates than they would have been if they were not enjoying the guarantees. So it's easier to pass that. So, when we have the example of explaining how guarantees work, we have basically your aunt guaranteeing your loan on your mortgage, and then you get a cheaper interest rate from the bank, and the bank doesn't care if you have equity. So their creditors are not normal creditors in terms of what they demand. |
| 22:29 | Russ: I hear that a lot. I think that misses the other important point. When I read your book I was waiting for it. And you do mention it. But I don't think you emphasize it enough. So let me try to make this point. So, what you are talking about now is: If I go to buy a house, and I have a rich aunt who has got a much better credit rating and history than I do, I'm going to be able to get a better interest rate if she guarantees the loan than if I try to use my own credit rating. And that's one part of the subsidy that the guarantee of large financial institutions allows them to borrow money at a lower rate from their creditors than they otherwise would, when they issue bonds. So, Fannie Mae is a great example of this. Fannie Mae, which was not guaranteed explicitly, but implicitly was; and then did get it actually--its bondholders did get all their money back--Fannie Mae paid a slightly higher rate than Treasuries. But not much. Slightly higher, because there was some chance that the Federal government wouldn't stand behind them. But they were like Treasuries with a higher rate. So, a lot of people found that appealing. The Chinese government bought a lot of that. My Dad helped, as I have often mentioned on this program--Fannie Mae bonds. And those people got their money back, because of the promise. So, as a result, Fannie Mae could borrow money relatively cheaply. But the other part, it seems to me, which is much more important--and maybe I'm wrong--is the size, of how much I can borrow. So, if I'm buying a $200,000 house and I'm borrowing $160,000 of it, and I'm putting 20% down, putting $40,000 down, then yes, when I borrow the $160,000, my rich aunt's guarantee lets me pay a lower rate of interest. But the cool thing about a rich aunt is now I can buy a $1,000,000 house and put a very small amount down, that a bank would never let me do; and lenders would never lend to Goldman Sachs and Bear Stearns and Lehman Brothers if there only is a 3% equity cushion unless they thought it was guaranteed. Guest: Well, it depends whether you use the same amount of money. If you have to do more and put more of your own money, then again, if it's shareholders' money, they would potentially just let it sit as a fraction. If you can have very little of your own money and keep borrowing and borrowing, then of course that would be like higher leverage, and you'd definitely have an incentive to do that. Which really goes the heart of what makes banks hate equity so much. So, you will tell your aunt that equity is expensive. You don't want to put your own money at risk because it's much nicer to get the upside and be protected on the downside. You can go invest it in Treasuries and never lose, and then you get all the upside and magnified. So it's great. Russ: And my understanding--again, correct me if I'm wrong--is, no debtor, no lender, no creditor would give money to a bank under fixed income conditions with a 3% equity cushion, an inadequate cushion, unless they were pretty sure--not 100%, but pretty sure--that there was a rich aunt. Or a rich uncle. Uncle Sam, in this case. Guest: Right. You didn't mention when you said, people get smarter--we tried so hard to make it entertaining to read, where we had these cute epigraphs and all of that, right. And so we have the aunt, and then the banks, and Uncle Sam, cute little rendition. One of the things that we point out also is there is a sort of maturity rat-race phenomenon which is written about, by Markus Brunnermeier, other people [?] there are the papers about that. It's part of the sort of dark side of borrowing. And in banking what happens is they have this ability to borrow in all kinds of ways. So, for example, people like to talk about repos [repurchase agreements] as sort of the new form of deposits. Well, it's a trick to borrow; and the trick is: Here's a, JP Morgan, trillions of dollars, really, depending on the accounting system maybe $4 trillion goes through that fortress, supposedly. And among the numerous ways that they borrow, this repo means basically that I sell you an asset overnight, the collateral, and I promise to buy it back. So, my promise is basically the promise that I'll buy back that asset from you, and the interest is sort of folded into that. Russ: I don't buy it back at the same price. Guest: Right. Russ: That's how the interest gets folded in. Guest: But the trick there is that this arrangement, since very recently, actually, just since I think 2004 something, in the United States is exempt from stay in bankruptcy. So, should I, in the imaginary scenario that I actually can't buy it back from you the next day, you could just walk off with it, out of the courts, out of the frozen-from-bankruptcy process, out of the priorities. So essentially you jumped ahead of everybody, because you own that collateral overnight. So, this is among the many ways in which they manage to get the creditors to agree to lend them and basically think they are safe. So, the depositors feel that they have deposit insurance; some of the creditors have all kinds of collaterals; or they have the belief, as you said, of implicit guarantees, especially in the case of the largest banks. But even in all the cases of the entire system, somehow or other there is a belief that they will be paid. It's not true for the junior debt of a small bank, because actually the Federal Deposit Insurance Corporation (FDIC) might impose losses on them, maybe. But of course if they become systemic then in the Crisis even that was supposed to absorb losses never did. Russ: Just like in a foxhole there are no atheists, in a banking crisis, everybody's systemic; or at least everyone claims they are. There is always going to be an incentive to explain why my bank is so crucial to the future of the country. Guest: You have to pay all my creditors. From then on, my creditors are nice and allow me to borrow under terms that some other people in the economy or corporations cannot borrow, and therefore they don't. |
| 29:29 | Russ: So, to go back to my question: Do you believe that if banks had larger equity requirements--let me phrase the question differently. I believe that if banks had larger equity requirements, they would be smaller. And it would be much more difficult for executives in banks to make as much money as they make today. Because I think--I understand there are formulas that determine their pay that are based on returns on equity, and so they have an incentive to magnify that artificially, and accounting tricks, etc. But I believe that if we had high equity requirements, they would change their compensation structure. But even if they did, the banks would be smaller and they would not make as much money. Guest: So, the key here is governance, really. In our corporations--in most other corporations, really, the governance issue is between shareholders and managers. In banks, there are so many creditors that you almost find the governance problem really resembling more of a creditor-borrower problem, because it's kind of managers and sort of narrowly-defined shareholders against kind of creditors and deposit insurance: who gets the upside and the downside? So, precisely as you said, one of the corrections that would happen if they had more equity is the equity would bear more of the downside, and then they might care more about the downside. And therefore they might then not allow managers to be compensated in the ways that encourage risk-taking. Russ: That's exactly right. Because right now--I always point out, and I got this I think from Gary Stern's book, Too Big to Fail, who we interviewed a long time ago--but generally, the debt holders are the people who care about the downside because they don't get the upside. So, they're the ones to make sure that banks don't act too recklessly. And if you take out their downside, there's nobody else. Guest: So, no creditors are helpless, with their dispersed [?] they have no governance role. In other corporations they would just walk away, but in the case of the banks, somehow they are agreeing to be there and the banks like it that way. Russ: Some people, when I make this claim, they say: Well, shareholders care about the downside; they don't want to be wiped out. And that's true. But they don't mind if firms take risk. We are not talking about someone who steals their money. We are talking about a firm that takes risks; the shareholders get the upside; they diversify, so that they have a lot of these. Guest: Yep. Right. But still, my claim to shareholders, and I've written about this, too, is that the system really works only for managers and very, very narrowly defined shareholders, because diversified shareholders end up losing from financial instability. So, how did the S&P 500 [Standard and Poor 500 Index] perform as a result of the crisis? So, the banks managed to maybe squeeze subsidies out of the rest of us. But then we all paid. Dearly. Russ: Yeah, it stinks. Russ: So, just to clarify. What do you think, if you imagined a conversation between the executives of a bank and the executives of a non-bank, say, a manufacturer or service provider--would the bankers say: Hey, guys, you are missing out. This debt's great; you ought to borrow more. What would the "regular corporations" say in response to the bankers' encouragement to borrow more? Guest: Well, they would say that borrowing becomes really tough on the borrower, and the creditors would have all kinds of consequences for the borrower when it gets to heavy levels. And that in fact the debt contracts don't allow them to continue borrowing, don't allow them to pay out; and the creditors are very nervous people when they lend them, and so they would put covenances in, they would tell them they can't do things without creditor approval. They would behave like the creditors that worry about the downside. And so they would tell the bankers: You are lucky because your creditors nicer to you than our creditors are to us. Russ: So, we've been talking about commercial banks. And of course they are nicer because they have this implicit guarantee. I assume. That's been my theory from Day 1. I try not to fall prey to too much confirmation bias but I don't know what the alternative argument is. |
| 33:47 | Russ: But it raises the question: We've been talking about commercial banks. If we talk about investment banks, meaning Bear Stearns, Lehman Brothers, Goldman Sachs--and parts of the commercial banks, Citibank and others have investment bank parts--these are folks who took the money and they didn't put it in mortgages, directly. They put them into assets--some tied to mortgages. They put them into other types of speculation. They invest the money in a very different way than a commercial bank. Who is lending to them? Who are the net lenders to the investment bank sector? How is it that all of these banks are running leverage levels of 98:2, 45:1, 97:3? Who is providing the liquidity for the investment banks that allow them to run wild with that money? Guest: Well, at the end of the day, it's all linked together and within itself. In other words, there's a lot of interbank lending and borrowing. And this goes back to--the people think of separations but it's very hard to separate. Because we give money to money market funds, and money market funds lend to the banks. And so here you have the depositors' money going some directly to the bank and some to the money market fund, and the money market fund then funds the banks. And it funds the investment banks, the trans-European banks, they fund each other. So there are many ways in which they borrow and then there are many ways in which they invest, as you said. And some of these investments--they also come back to the mortgages. The mortgages were securitized, they were made into marketable securities; and not all of it is bad. Because diversification of risk is good. So, to a point all of this creates what we want the system to do, which is to spread the risk around and lower funding costs and allow productive investments in the economy to be funded. And all of this there is a role for a financial system. But the system gets very distorted because they have incentives to get very complicated and very complex and all knotted up. And globally, too. So that they become kind of very difficult to resolve or to fail. And then gives them more ability to continue growing like that. Inefficiently. Russ: But if I look at the balance sheet of, say, Bear Stearns in March of 2008, or of Lehman Brothers in September of 2008, when they were both in severe crisis--I thought Bear Stearns should have been allowed to go bankrupt; I think then Lehman would have been different. But who knows? Hard to say. But if we look at the creditors, the people who were involved, a lot of them were the other large banks. Right? Guest: Exactly. But that's okay. You can have that. You can have the banks grow, owing and lending to one another. This is where we can see the counterparties. We go through the book, for example, on 'netting.' Netting on derivatives basically means that I owe you and you owe me. In market value, not in the same contract. We netted out. We just pretend that the part--I you $150 and you owe me $100, and we just erase the $100, and it's just my debt to you of $50. And the balance sheets don't show that. If we didn't net, we'd have bigger balance sheets like they have in Europe, and we show for JP Morgan that snapshot is $1.8 trillion dollars, which is almost double the size of the bank, really, assets and liabilities, which means that its equity is that much less as a fraction. Just that is with the same counterparty. In other words, that just shows you how interconnected they are. When we come to regulate counterparty exposures they scream that having an exposure to the same counterparty of no more than 10% of their total equity, their capital, that that's terrible. That's amazing. If 10% or more of your equity is exposed to the risk of 1 counterparty failing--meaning if they don't pay you, you could lose 10% of your equity--that's incredible interconnectedness. Right there. So there's an enormous amount of interconnectedness in this system. And that's partly why we have the systemic risk, that it's sort of like a set of dominoes standing one next to another. Through various mechanisms, it's sort of they all end up failing at the same time. Or the failure of one triggers a huge problem. And that's really why it's really important to reduce that fragility. And why it's also hard. And also why making individual banks a lot safer makes the system so much safer. Russ: But we incentive through policy. We incentivize that complexity. We gave them an incentive to create it. Guest: That's what's so perverse about the situation. We are feeding the addiction to something harmful. We are subsidizing pollution of the system through excessive [?], does nothing good but just is sort of people in the system have incentives to take. And it's not productive risk at all. I'm all for productive risks being taken and when the banks say, Oh, we invest long term; we do this and that--the real productive long term investments are made right here in Silicon Valley. And they are funded with long term funding, equity funding, and they can fail. And they do. Russ: And it works great. Because every once in a while they hit a home run and the world is a better place for it. Guest: You want to take risks, for innovation. I don't have a problem with risk. What I have a problem with is excessive risk that does nothing but is a leverage risk, a financial risk, that's packed on to of the risk of actual investments. Russ: Yeah. Take risks with your money. Not mine. Guest: Exactly. Russ: Unless I agree. If I agree to it, I'm okay. Guest: Exactly. Other people's money is also equity money. But the borrowed money comes with that legal commitment and it is hard to untie that commitment. And that's the problem with it. So they should just do much less of that. They should fund less with that and their incentives are to only promise, promise, promise. Legally. And when it doesn't work out, it's somebody else's problem. |
| 40:05 | Russ: Now, I like your story. And listeners know that I agree with it. So let's try to challenge it a little bit. Let me ask the following question. Now, since the Crisis--since 2008, 2009--the biggest banks are bigger than they were before, I think. I assume leverage is about the same, if not more. Guest: It depends how you measure it. All these things, really that's a whole can of worms, how you measure. Russ: But nobody's prudent. I wouldn't say anybody's gone out and said: Gee, we really were irresponsible; it was terrible what we did to the American people; we're going to raise our equity to 10%. Guest: They don't have incentives. Russ: Right. Guest: It needs to be the whole system, they have incentive to compete to lever more. Russ: Correct. So, given that's your story--and it's my story, too--why haven't we had another crisis? Why would banks be prudent at all? Why did banks buy credit default swaps? Why bother with that? Why not just be reckless and collect a lot of money when things crashed and keep going and enjoy the upside and avoid the downside? Why is there any prudence in the system whatsoever? Guest: One of things that's stopping it a little bit is we do have regulation in place. This is recognized that in banking you must have regulation to maintain the depositors' funding and to prevent--ever since we had deposit insurance we do have supervision regulation by the FDIC and other regulators. And banks are regulated in every country. The problem is that--so it's the regulator's job, because creditors want to be safe, and the depositors in particular want to be safe, what you have is it falls on regulators to contain the risk in this system. The credit default swaps were part of the attempts to pacify the regulators. To tell them the risk is gone, and then therefore we don't have to worry about it. Except the risk all went to AIG. Russ: Yeah, well, I like it. When I was explaining to someone that AIG was a bad thing, someone said: Well, but people made those--people were insured. Thinking people were insured--JP Morgan Chase? Lehman Brothers? You're right. They went through the motions and it does matter whether your insurance company is solvent. Guest: Exactly. This insurance company ended up accumulating all these default risks which then nobody also cared to monitor in terms of credit-worthiness. Which reduced the quality of loans, too. So in this process a lot of it built up in AIG, and these regulators didn't keep track of the risk to where it was going, and allowed all kinds of entities in the shadow banking system to be backed up by regulated banks. All kinds of build-up of the risk that ended up coming back to haunt all of us. So, there was a regulatory failure before, which of course they now want to start the story where they saved us from all these disasters. But the story really goes back to how they failed to contain this risk in the beginning and how they are continuing to make the same mistakes now. Russ: So, explain that a little further. How is it that credit default swap purchases by banks--which, I always hear them say: We were prudent. We weren't reckless. We had insurance. My response is: since everybody insured with the same person, or too many of the same people, it didn't work. You're telling me that some of that credit default swap purchase, that insurance, was for the purpose of complying with regulations. Guest: Yes. Russ: How is that? Explain that. Guest: Because the regulators would want them to have some equity backing, but they told them the risk is gone, therefore they don't need it. So, it was basically allowing the regulators to think that they didn't have any credit risk any more on their balance sheet; it was gone to AIG, and they were all safe then. Russ: Which is the same argument they made with Triple-A. We have Triple-A-- Guest: Exactly, exactly the same. They would say, Look, we invested in something safe. Now, the regulation allows European banks, with no backing by equity at all, to invest throughout the Eurozone pretending that all that is in the Eurozone is safe like cash. That is saying that the Greek debt that is paying 20% is as good as cash. And you can back it up totally with borrowing. Russ: Well, that's because the Martian Central Bank will bail them out eventually. That's what I'm counting on. Guest: But this shows you how crazy and political some of these regulations end up being. And they always, so the banks would have those incentives. And this is actually how we blame some of this structure of this regulation with interconnectedness, because they all tend to go to where the regulations use it as safe, but it's not actually safe and it pays a little bit more return. And then they can scale that up. So if the regulators all say, Oh, the risk is gone. Oh, fine, then you can do lots more with borrowed money. Then, all of a sudden, AIG needs a bailout. So, they replaced basically the default risk of their creditors with the default risk of AIG itself. Russ: Yeah. Great. |
| 45:29 | Russ: So, what can be done about it? Let's first talk about your proposals. I'll give you some others to react to, but what would you suggest we do to stop this from happening again? Guest: Well, there are just some really simple, obvious things to do. Which is, first of all, we are very concerned about the weakness of many banks. So there are claims and there are signs that some banks, especially in Europe but even in the United States are really weaker than they appear. And all these stress tests don't impress me very much. Because they focus on accounting numbers and they allow risk weights and they use all kinds of models that I don't believe. And they don't actually take into account the collateral damages and a lot of interconnectedness. I am not sure of all the details; when I start looking at them I feel kind of numb; but to me it's obvious that where we are, I know where to go, from here. Which is to, if I had to put them to a test, I would tell all the banks to go raise some equity. But equity, common equity, not from Warren Buffett with promises of 9%, but common equity. If somebody cannot raise equity at any price, although not at a price they like, but any price, there is a flag about that. They are either too opaque or too risky, or insolvent. And we want to know that now. So if we knew now who is weak then we would actually be dealing with them and kind of remove them from the system. Because sick banks tend to lend to unhealthy borrowers and maintain bad loans on their books and not make new loans. They are just a drag, basically. That's like Savings and Loans were allowed to, with forbearance, to stick around too long. And that could actually also clean out some excess in this industry. And then, the viable banks should be strengthened by retaining their earnings, first and foremost--that's equity dollars that are already there. So allowing dividends is like completely favoring very few banks-- Russ: Insane. Guest: Completely insane. There's no benefit to that at all. And then they tell you they can't lend. I mean, they are not even lending their deposits, let alone these retained earnings. They want to do something else with them than lending. Of course they like to threaten that they won't lend. But in any case, they should be strengthened right away, and we should aim for much, much, much higher--we've got plenty of time to figure out when to stop. We know what to do now, which is to strengthen this system. That's what we suggest, and we suggested the targets that Basel III set and the structure of that regulation is entirely insufficient and entirely flawed and doesn't learn the obvious lessons from what just happened. Russ: Basel III is the latest round of international banking regulations. I always find it funny when people say, Well, we need international regulations because that way there's a level playing field. First of all, I don't care about a level playing field. If other countries want to subsidize their banks, that's their problem. But when people say they want an international system, what they really mean is they want a system that's far away, with limited oversight from the domestic population, so that the insiders can write the rules. And so I assume that Basel III, the people who are most concerned about it are the banks. And I assume they spend a lot of time trying to influence it. Guest: Oh yeah. This is the politics of banking on which we have one chapter in the book. There's no talking about banking without talking about politics. It's very highly political. And basically, in Basel you had governments coming in with their bank lobbies, together, to impact international agreement, which ends up being a race to the bottom, really. With very few people fighting for safer coordinated effort. And the reason you would--what you really want to coordinate is you want to coordinate the resolution mechanisms if we have any hope of allowing banks to fail, global banks. So that's super important. But that's not the solution to the problem. The solution to the problem is, as you said, that every country makes sure that its banks are safe. And we have a little bit of a race to the top. When somebody tells me that they would move their money to French banks, I say my heart goes out to the French taxpayers. Russ: That's right. Good for you. Guest: It's really crazy. Russ: Yeah. Help yourself. Guest: They also end up winning against other industries. Because if you bloat them with subsidies then they end up taking people who might be productively employed elsewhere. We just don't know any more what's right because it's all distorted. Russ: Well, it's worse than that. I've said this many times; I'll keep saying it many times: The other result is that we allocate the capital that we do have towards, say, too many houses. Instead of better medical care, better cars, better gas mileage. Guest: We subsidize so that's what [?] is saying, the way we subsidize, in fact borrowing, for housing maybe we have too much housing; and certainly the way banks behave left a lot of empty buildings around the world. |
| 50:40 | Russ: So, I think it was the late 1920s or early 1930s, certainly before 1932, Franklin Delano Roosevelt, when he was governor of New York, said that Federal deposit insurance can't work, because inevitably banks will take too much risk and then depositors won't have to be careful because they are backed by the government, so it will spiral out of control. He was onto something there. He eventually supported it when he was president. But this whole idea of insurance, which starts off as a nice idea--small depositors don't have to worry about whether the banks are safe--somehow gets extended to people who lend money to Bear Stearns overnight to buy stuff that's highly risky. And so the question is: What's feasible to stop that from happening? Your solution is to raise equity requirements. Richard Fisher, the head of the Dallas Fed, has a proposal where he says: If you lend money to an investment bank, when you do that you have to sign a piece of paper saying that you are aware of the fact that that money is at risk. Now, I'm not sure that is going to make a difference. It's an interesting idea. My preference would be we don't bail anybody out at all. Period. Which of these do you think have the highest political chance of passage? Which of these might actually be supported by the American people and make its way into some real world solution? Guest: Well, I know what I would prefer and I can argue why that's better. So, you say not to bail out. The problem with that is the collateral damage [?]. So in other words, what happens when a bank fails and what are the stock choices? It depends where you want to leave the regulations in terms of trying to prevent that before we get to failures, or even to distressed by my book. So even if you don't bail out--we didn't bail out Lehman and it just has collateral damage. So financial crisis, should that happen, tend to linger in terms of their interaction with recessions and other variables. So that's what Reinhart and Rogoff show, and other people. Russ: I'm not sure I agree with them. But keep going. Guest: I don't know. But in any case, I favor deposit insurance to a point, because runs can be inefficient, and runs can start like in the movies. It's true, even in the Depression, we make this point in the book, usually depositors know which banks were healthy or not. But I favor explicit deposit insurance to a point, but I favor effective regulation after that to really contain the safety net so that it's not needed as much. What Richard Fisher is saying is that we need to have loss absorption. So, we all kind of agree on that. It's a question of what form it takes. If you say that I want the creditors to agree that they would suffer losses, again we go back to who they are, the creditors; and if banks lend to one another, what's the worth of the piece of paper that they sign this if they themselves are going to become weaker, and then we'll care about that. So, it's a question of who can absorb losses. What we are saying is basically that there is a lot of risk capital in the economy and that banks should just approach that investment community much more than they want to. And so the regulation should focus on making sure that they deal with investors that really know they will bear the downside. Much more. And do much less of any kind of signing of any kinds of pieces of paper. Triggers and promises and all of that, that we have fewer promises. Russ: So, what level of equity would you want to see? Guest: Well, people always ask about the numbers. And I'm very happy to have people like John Cochrane and Eugene Fama say: Oh, 50% sounds good to me. Because then I sound so sane when I say 20-30%. I'm such a moderate. Russ: That's right. And the bankers say: 3%. So that's good. Guest: What Cochrane said was: Until it doesn't matter. That is, until there are no more bailouts, they can stand on their own feet. So, we said, sort of as a starting point, at least 20-30%, because it's a matter of allowing the equity dynamically to absorb losses and not always working to a number. So we want a range, a conservation buffer. Because equity is there to--what happens when you lose is equity is supposed to absorb it to a point. But then you should bail it out, you shouldn't pay and all of that. So that's the concept of a conservation buffer. So, we talk precisely about how to make it work. And we kind of throw out the 20-30%, but we know and point out that the big can of worms is who puts the numbers on both sides of that balance sheet. And is it market values, is it book values--exactly what do regulators look at to tell them what's going on in terms of the dynamics of it. Because balance sheets, accounting balance sheets come every three months and they tend to lag, and there are all kinds of accounting conventions there about how you account for losses, and there are lots and lots of issues there, about what's the value of your assets, what's the value of your liabilities? Therefore how much equity you have. That's a whole discussion that needs to be had. We just kind of wanted to stake our position as a lot more than what they are talking about right now. A lot more. Russ: But you do raise the problem, which is: Measurement is a lot trickier than it sounds. And I think, fundamentally, it's a political problem. As you point out, you can't avoid the politics; the bankers are very politically powerful. I think till the American people demand that they be treated differently, which we're getting to, we're getting there. I was very depressed in the last Presidential election in America that neither candidate, Obama or Romney, felt that this was a central issue. Until a candidate makes it a central issue, it doesn't really matter. Because the banks will manipulate the regulations, manipulate the system. To me, it has to come from the politicians saying: No more. And they are not going say no more until we say no more. Because they have another voice that says: More. Guest: That's precisely why we wrote the book. Because you just couldn't penetrate this unless you got a little more political pressure that something is not quite right. That we don't want to wait for another crisis. And we already have a crisis in Europe that could implode and affect us more over time, we don't know. But there's no reason to maintain this inefficient system, crisis or not. Every day it's not an efficient system. And so indeed both parties are reluctant to do something, but we have a little more noise right now and the noise is good. Bernanke admitted yesterday that he agrees there is a problem. That's a big step. Because they've been in denial about this all the time and they refuse to engage. Russ: Well, he knows where his bread is buttered. It's your quote, right--didn't you say--what's the quote? You have a quote from Upton Sinclair. I can find it. Guest: There are multiple quotes. Russ: This one. Guest: The quote is you can't teach somebody something if your salary depends on not understanding it. Russ: I've got the exact quote right here: "It is difficult to get a man to understand something when his salary depends upon his not understanding it." So, it takes Ben Bernanke a while. Guest: Also for the politics on banking, there was a quote from an Austrian playwright that said: The king is naked but under such splendid robes. Russ: Yeah. Well, that's very apt. |
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| 0:33 | Intro. [Recording date: March 20, 2013.] Russ: Your book is about the digital revolution and how it's transforming medicine--a little bit so far and perhaps a lot more to come. I want to start with the example you give of how much of medicine today, particularly clinical trials and the efficacy of various drugs, looks at the average person rather than the individual. So, what do you mean by that? How is it changing now? And how might it ultimately change down the road? Guest: Well, unfortunately, because we didn't have the tools until now to define each individual, the default mode has been: Treat everybody the same. Have everybody come in for screening, whether it's a mammogram for women or prostate specific antigen (PSA) for men, have everybody come for an annual physical exam, and also give the same drug to all patients with the same condition. Medicine has been terribly dumbed down. Russ: And the same dose. Guest: That's right. And the same drug that doesn't work in lots of people. So, we've got a real problem and that is this waste and imprecise use of all our treatments and our procedures. It's a mess. Finally we have a time when we can rise above that. Russ: How? How's is that happening now? You give some examples in the book of how recent genetic discoveries have improved our understanding. But how might it go even further down the road? Guest: Well, it basically is so pervasive, how this can be rolled out, it's why I call it the creative destruction or complete re-do, rebooting of how medicine is practiced. So, you pick an area of interest--let's say, cancer. So, in cancer, last year in 2012 there were 12 new drugs approved by the Food and Drug Administration (FDA). A banner year for that. And 11 of the 12, the cost of the drugs were over $100,000--per treatment. And that's pretty characteristic of most of the relatively new cancer drugs. But the way cancer drugs are given--well, you have a disease of a particular organ, like prostate or lung, and you get a drug based on that. Well, that of course doesn't work very well. Not only is it a profound waste, but beyond that we can now sequence the tumor relatively inexpensively compared to the cost of the drugs, because they are usually used in multiple combinations. Sequence a tumor, find out what is the driver, causative mutation, and then go ahead and treat this in a very biologically based genome-guided way. That's just one example. I can just go on and on. Russ: But, the kind that I found exciting in the book is that a lot of times drugs are ineffective or worse have side effects that are harmful to fatal, and yet we are starting to learn some of the genetic descriptions of individuals that would allow us to avoid that kind of mistake. Guest: That's right. But unfortunately, Russ, a lot of this information is not used in medical practice today. So, giving you an example of that: A drug that's commonly used, called Carbamazepine, also known as Tegretol, that drug is given for a variety of conditions, neurologic conditions, seizures, depression, neuropathy. Anyway, that drug has got a 1 in 1000 chance, which we can accurately predict, of who is going to have a potentially fatal side effect, so-called Stevens Johnson syndrome. But we don't screen for that, even with that knowledge in hand. Whereas in Taiwan, for example, you can't get a prescription for the drug unless you have a genotype first. So, there's information that's well secured but not being used. And that is really unfortunate. And that's just the genomic side. We haven't started getting into sensors. Russ: Well, some of the reason we don't do those kind of tests is cultural. We talk a lot about the conservatism of the medical profession; we'll come back to that later. Some of it presumably is cost. What does it cost to do that kind of genotyping you are talking about? Guest: Well, if we were to get with it and have hospitals do their own certified, so-called CLIA[?] labs, they could do this for a few dollars. The actual genotype, once you know where to look, in fact it could be done for less than a dollar, the actual test. It's so inexpensive. But also as a cultural way, that everybody had their drug genomic profile defined, we wouldn't have to--if you gave a prescription it would already be cataloged. And it would be stored in people's homes or somewhere on their personal website, electronic record, or whatever. So, we don't have that mindset right now. We're not embracing genomics and we're not even--no less making more discoveries, which is happening, but we're not even taking the ones that have been made and implementing them into daily care of patients. Russ: So, the digital side of this would be the equivalent of the bracelet that I might wear if I were allergic to some treatment or something so that I would be able to advertise to health care professionals something about me that's unique. But ideally that should come about just through my entering into the health care system, which of course doesn't happen right now, right? Guest: That's right. That's a pretty fair analogy. I'm thinking that a lot of this would be stored on one's cell phone because that's usually very much connected to each individual; but a bracelet, a chip, whatever. This information should be available for everyone. Russ: My cat could have that chip. Guest: Yeah, sure. We've got more chips for our pets than we have for our people. Russ: Well, for obvious reasons. They make people a little bit uneasy, for cultural reasons. We'll talk about that later. |
| 7:02 | Russ: I want to come back to what you said a second ago about PSAs and mammograms. One of the interesting tensions in your book is between individuals having a lot of information about ourselves--not enough versus a little. And usually we'd say more information is better. But there are a lot of false positives with PSAs and mammograms. And you give a very chilling and powerful story in your book of the guy whose wife gives him some kind of imaging test as a birthday present and as a result his life gets turned upside down. Talk about those tests: why they are not always a good idea. And what are some of the consequences when there are all these mistakes. Guest: Yeah. You've touched on many concepts with that question. So, on the one hand when you have recommendations that all people should have a PSA or a woman should have a mammogram--all the data show that that induces net harm, because it's not suitable for mass medicine. But the other thing you brought up is all the unnecessary things that are done. Like, in that example, you mentioned the spouse--she got her husband a calcium score, a CT scan, which indicated that he had a lot of calcium somewhere around the arteries of his heart. Which is a common problem in American medicine. And then that just led to this express train ride that went through getting an angiogram and then having all these stents put in to multiple arteries. And this fellow had no symptoms. Which is quite common, by the way. And so you have--you've brought up both the unnecessary procedures as well as the ones that are driven because of our inability to differentiate one individual compared with the next. So, we got a lot of problems with this population-dumb-down medicine approach that are now, finally--there's a solution in sight. Russ: And the other example I think is strictly fascinating and I think relates to a lot of previous conversations on this program is the power of evidence--so called evidence-based medicine. And one of the challenges--I wouldn't call it a challenge. I guess I'd call it a mistake. One of the mistakes we've made in trying to make medicine more scientific is using, say, various tests as our goal of lowering a score on a cholesterol exam. When it may not be correlated with heart attacks. But, quote, "it's the best we can do." So we do it anyway. We've had Gary Taubes on this program, who is very skeptical about the role of fat, say, in heart attacks--which is what we care about, not so much in cholesterol scores. So, what's your thought about what we know so far in those issues? Where are we? Guest: Well, we don't have a good body of evidence. Our evidence-based medicine is--it's a nice buzz word, but a lot of it is eminence-based medicine, where a bunch of people sit around in a room, these experts, and they just make an opinion about what everyone should do. All patients with this diagnosis should have such-and-such. And that doesn't work. Russ: And then you can measure that. You can grade a hospital on what proportion get that drug within that amount of time. Guest: Yeah. Appropriate example that you just brought up was the LDL-bad cholesterol. And what a mistake--what a misadventure that has been. Because basically, the benefit of taking a statin for people who don't have heart disease but have a high cholesterol blood test--this is just fixing the blood test, which of course that works very well--but in terms of reducing heart attacks or preventing deaths, we only benefit 1 or 2 people out of 100. We then medicate these people. The whole idea of making a nice lab test--98 out of 100 are taking the medicine just for that. And that's the most--the statin drug class is the most successful drug class in the history of the pharmaceutical industry. So that just shows you how bad our approaches have been. That's one of the most--evident. But the evidence is scant. One to two per hundred, statistically significant. And people talk about the 33% reduction in heart attacks. But that's going from 3 to 2 per hundred. So this is an unacceptable--even when there is evidence, it's not evidence that's strong. We need to have overwhelming evidence. That's what we should be seeking. Because that's going to make everything much more precise. And economically attractive. No less better outcomes for patients. Russ: So I want to come back to that PSA example because as I was reading your book a couple of days ago I came across an article, I think it was in a British newspaper, of three urologists in their late 50s who all got prostate cancer and two of them found it soon enough that they're probably going to be okay. The third one has a short period of time left to live. And all three were discovered they had--I have to be careful, not all three--a PSA test played a role in their diagnosis and their discovery. Are you suggesting that that's a small sample and that ignores the other people who take that exam, have their prostates removed, say, for no good reason, deal with the side effects of that--you said there was a net harm to that exam? So are you saying we should not take that exam, if you are over the age of 50, say? You should not take a mammogram? Guest: That's right. PSAs should not be done. And the data for that are that there are 250,000 men each year in the United States alone that have a false positive PSA. And they undergo serial biopsy. Not just one, but multiple biopsies, which are not only extensive but painful. And then there turned out that there would be a false positive. So all those men who are harmed along the way, no less the emotional hardship of dealing with this abnormal PSA, and they don't even have prostate cancer. And that greatly overrides the few men that are picked up relatively early for successful treatment. So, if you look at it from a population level we're doing harm by using that test. And similarly, from mammography, the data shows no benefit. That has been reviewed recently and published in a journal--we continue to keep doing mammography even though there is an overall lack of benefit. But the answer there and recommended by the authors of the New England Journal paper was: We need a better, more precise strategy--a family history of breast cancer, for example, genomic risk of breast cancer, for example. Those women should get mammography, whether it's every year or even a more sensitive test. And the women who have no family history or have no genomic sensibility. Maybe they get a test but only once a decade. Or not at all. But we don't have that sort of individualized approach today. Russ: I think the other challenge for most of us is a temptation to then say: oh, thank goodness; I don't have to get any more tests any more because they scare me. But that is not the lesson. The lesson is that some tests are good and some tests are not worth it, right? At least on average. Guest: Sure. The problem is everybody's been average. And that is wrong. We couldn't be distinct. There are not even identical twins on this planet that are the same. And so we have got to move in that direction. And we couldn't do it before. But with sequencing and sensors and all the other tools that we have at our disposal it's time to do that. |
| 15:36 | Russ: Let's move on to some of the innovations that have happened in genetics so far and what might be coming. Learning more about one's own genetic makeup is very scary to some people, partly for privacy reasons but partly because I think for some people it makes them feel like they are losing their free will. They are getting too much of an advance--a preview of the future. They'd rather be left in the dark about their likelihood of getting some disease and having that hang over them. Talk about that phenomenon and then some of your own experiences, which are quite interesting. Guest: One of the things at the moment--I've had my genome sequenced and I'm pretty healthy; and I wouldn't recommend that now, to have your genome sequenced if you are healthy. I did it more out of academic curiosity. But if you are sick, if you have a serious illness which has not been diagnosed, you could make a good case today for going to sequencing a lot earlier than has ever been done before. The so-called 'diagnostic odysseys'--they are individuals who typically go from one medical center to the next, to the supreme-court place of medicine; and they still don't have a diagnosis. And we just had one that we presented at our genomic medicine meeting here in La Joya, and in fact had been to ten such medical centers. But when we did the sequence--this was a 16-year old girl with a pretty severe neurologic abnormality, condition, we were able to find exactly the two gene mutations that were causative. The root cause of her illness, that she'd gone 16 years and millions of dollars in the odyssey. So there is an easy one. And in fact even insurers are starting to say: Maybe we should go to sequencing much earlier in the saga. Russ: What does it cost right now and how has that changed in the last ten years? Guest: Oh, wow. It's reduced more than a millionth-fold. The cost of sequencing for an individual would be about $4000 today. But in order to understand that individual you need siblings or parents, so you really need a trio of three. So you are talking about sequencing costs of somewhere, by the end of the year well less than $10,000, but it's in the $12-15,000 at this point with all the analysis. So, it's pretty inexpensive compared to millions of dollars spent trying to get a diagnosis through the old way of practicing medicine. Russ: Is the price coming down? Guest: And the price is coming down; it's expected by year end to start to get pretty darn close to--well, less than $2000 and maybe closer to $1000 per whole genome sequence. Russ: Now, help me with the science. A genome sequence is say about $4000 right now. There's something else that's about $400. What is that other thing? Guest: Oh. Well, if you do a scan of the common variants in a genome, which is really almost becoming not useful--so you can get that now for $99 through 23andMe.com. There aren't many of those consumer-genomic companies still standing. That's certainly the main one. It was $400; it's just come down over time to now $99. That gets you a peek into the genome. It does get, by the way, going back to our discussion earlier about the drug interactions, it gets you something like 25-30 major drug interactions about you. So, just that alone is a bargain in my view. But it doesn't get you every single letter of your genome sequence. There you are just getting hundreds of thousands rather than 6 billion. Russ: Why are they going out of business? Do you know? Guest: Oh, the other companies? Well, DeepCode, Navigenics, there's been a few of them--they were charging a lot more, well over $400, and they could not get enough people to buy into that. And 23andMe brought the price down to $99 and that's starting to get a lot of interest and support. Initially when Navigenics came out a few years ago it was $1500 for this limited genomic information of common variants. And that just wasn't going to fly. They had bad expectations about how much people would pay for what was minimal information. Russ: And what do you mean by 'drug interactions'? What's an example? Guest: So, the 23andMe panel that anyone can get for a saliva kit sent to them, that gets interactions with drugs like Plavix, like various cancer drugs. Caffeine, even. A whole list of drugs. Warfarin, the blood thinner. I don't remember all 27 of them offhand, but it has a lot of useful commonly used drugs with very strong data to support the variant in one's genome. Russ: But the interactions you are talking about are not between drugs, but between the drug and you. Guest: Yes. Exactly. So, let's say you are prescribed to take Warfarin, blood thinner. Well here you'd know the dosage you should be taking. I mean, I know that the average person takes between 5 and 7 milligrams. I know from having that that I should only take 2 milligrams. Otherwise I'd have a lot of bleeding. I don't have to take that drug but it sure is nice to know that well in advance, if it ever was prescribed. Some people have to take 20 milligrams to get the effect of their blood thinned. That's just the kind of example of the kind of information you get from that. Russ: So that's a saliva test, which is pretty pleasant. If you want your full genomic code, the $4000 thing, what do you have to do? Cut off a limb? Lock of hair? Half your hair? Guest: No. Russ: Fingernail? Or just saliva? Guest: You could do saliva but really to do it right you want one tube of blood. That's much better. I mean, it can be done, whole sequencing from saliva, but I think blood is superior. Since you want this to be as good as it gets, because this is your sequence. You only really want to do this once in your life. Why not do it right? And a tube of blood is pretty straightforward. |
| 22:34 | Russ: So, when you did it, you learned about your proclivity to get a bunch of different diseases and where you were more likely than the average person, less likely. You say you didn't do it because you were worried; it was because it was interesting. Guest: Right. Because I work in this space; I have tremendous curiosity. It was an opportunity. Russ: So having done it, how did it change your behavior, feelings, sensitivity to the psychological aspects of that kind of knowledge? Guest: Well, it's on my iPad, and whenever I get bored I can study my 3.4 million variants from the reference genome to see what is going on there. So, it's a lot of information to try to digest. But, with respect to--I know every possible drug interaction that exists today just by looking things up. And every week when something comes out, whether it's a rare variant for this or that condition, I can look it up now. I don't think it's so valuable today as it will be in 2 or 3 years. Because we are going to have millions of people sequenced, and we'll have so much of the whole of our knowledge filled in. But, did it change anything for me? On an immediate basis? No. It just provided lots of information. That's why I don't recommend it at this juncture. Because the price point isn't there. And also the knowledge of millions of people getting sequenced. I don't think it's prudent to do it now. But I think it's going to be great a few years from now. It will be much cheaper and much more informative. Russ: Well, my wife just got an iPad, and she asked me, naively, how many apps I have. I didn't tell her, by the way, because I didn't want to depress her. I think she thought it would be like 5 or 6. But I said it's maybe 100. I don't know the answer. I buy lots of things for my iPad that I just think are beautiful, and for 99 cents or $3.99, I just like the idea of them. I don't use them very often. Or maybe just once. But somebody did something beautiful or extraordinary, and I have to say even though I have no plans to get the genomic map for myself, there's something magnificent about the human enterprise being able to do that. For a mere $4000. It's a lot of money. It's quote "not worth it" to me--I won't do it. I'm healthy. But it is an extraordinary thing. It's a beautiful thing. Guest: Yeah. And you know what's interesting about that is you can go ahead and download an iPad app called My Genome, 99 cents. It's not your genome, even though it's called "my genome"--it will have a person's genome and you can basically find out what it's like to look up every variant in a genome. It's fascinating; just using your fingers to explore a human genome. So it's made for people who are not genomically literate. It gives you a feel. Russ: It reminds me of the story you tell about the thrill, and then not so thrilling, about when you were able to do an ultrasound on your heart. Tell that story. There's a lot of information there. Guest: Yeah. That was pretty wild. So, I was able to get my hands on the first high resolution ultrasound, Vscan device; and what I did when I got it was of course test it on myself, to see what was going on with my heart. And I didn't think I had any heart condition. I'd had a previous echocardiogram to see and whatnot. But when I did it everything looked okay, but I had this really big leak in my mitral valve. I said, Oh my gosh. It didn't make any sense. And then I went back to the old relic, my stethoscope, and I said: Well, I hear a little something, but not a lot of leak in this valve. And so I unfortunately started doing this late on an afternoon, evening, and I basically had a troubled night thinking: Where should I go to have my valve repaired with open heart surgery? But then I had made an appointment the next day to actually go through the normal full echocardiogram and that showed that I didn't have any significant leak. I had a small amount. Which I thought was the case. So, then I checked with the manufacturer of this device, and they had a--because I was almost like an alpha tester of this, they had a software problem. And the problem that I had-- Russ: Oops. Guest: And so that got fixed, and now that's not an issue any more. But I had a scare, just because of having an immature technology. One of the many lessons out of that is: You don't want to be using these things until they've been fully tested and vetted and proven that they don't have glitches in them, like I had. I've had a couple of things like that. The other one in the book was when I first got my very first Navigenics report, again one of the early ones, and it said I had a 108% risk of a heart attack. How could I have 108% risk? And I joked in the book--I called my wife and said I won't be coming home for dinner. Russ: And actually you probably weren't even talking to her then. You'd been dead for days. Guest: I know--more than 100% risk of a heart attack, that's really bad! These things really happened. It's scary. So you want to wait a while. That's another reason to wait to get your genome sequenced, even if you are healthy. Wait till we get a lot of the bugs out. There's still parts of the genome that don't get sequenced, or don't get sequenced accurately. So if you are going to go for it, wait. It'll be less than $1000 in the next couple of years, and it will be much more useful. Russ: One of the things that amaze me about that story of the heart image is how much of medicine until very recently--until the x-ray to start, and then the advances we've made in other types of imaging--how much of medicine was listening, both to what the patient had to say, and how the heart sounded with a stethoscope. That was what you had. It was an art. Guest: Yes. You know what gets me about that--funny you mention it. So, 1816, the stethoscope--we listen so indirectly to lub-dub for the heart, or for bowel sounds in the abdomen. Sound. Whereas now you can see everything. That is such a dramatic difference. I just can hardly adequately express that. And I used to be one of the big proponents of the nude doc students learning all the heart sounds, all the intricacies; and I used to spend hours--I'm afraid to think how many hours I spent at the bedside teaching that. And it's dinosaur stuff. It's all obsolete. Russ: Yeah. Well, thank God. Sorry. Guest: Not generally though, because of issues of reimbursement, because of the unwillingness of the medical profession to change, it isn't like it's been a shift where it should be. It will take time. Russ: But that kind of creative destruction, of your knowledge becoming useless in many cases, that's a good thing usually. Guest: I think so. Some people will argue with it, but I think you are right. |
| 30:43 | Russ: So, you mention in the book that the--I don't know what the right term is--the biogenomic, biological sciences revolution, it started with such promise in the mapping of the human genome. A lot of people argue that it's been very disappointing. And you remain both cheerful about the present--you've given some examples already--but also very optimistic about the future. You just said, for example--I don't remember this being in the book--in two or three years it'll probably be worth it. What's going to change to make the payoff so dramatic? Because one of the lessons I got from the book--I'm not an expert in this field at all; I'm pretty illiterate--but it's striking to me how complicated the genetic map is relative to what we thought. That's the impression I got from your book. So, given that that's true, why are we going--why are you so cheerful about the future? Guest: Well, I'm so cheerful because we have this amazing digital infrastructure, which has not been harnessed in medicine to a significant extent yet. And just by having the broadband, the connectivity, the social network capability--all that stuff. And then you've got these sequences of the genome--not just the DNA sequence. But you can sequence the RNA. All the proteins, all the metabolites, all the so-called epigenome, which is the side-chains of the DNA. And not just of an individual but let's say of a bacteria or virus that's infecting an individual. We have such potent tools now. And we have these sensors that can come up with data in real time on virtually any physiologic metric, anything that makes us tick. So, when you have all this together, you know, this term I use about the 'superconvergence' the likes of which we've never had in our history, this sets off this unique time, this true great inflection of medicine. Which I think we're just getting started with now. Russ: Well, we see it in so many areas outside of medicine. So the obvious question is: Why not medicine? And the answer isn't because we're not learning more. The answer is the industry is not very well suited to deal with innovation of that kind. What do you think is going to change with prevention? You bemoan the fact we spend a lot of resources in medicine, of course, reacting to changes in our health. But we don't do very much for prevention. In fact, I'd say for most of us the biggest thing we do that's preventive is, we exercise some. Which, I like the idea that it helps me but I'm not so sure the science is there. We can probably do a lot better. What are some areas that you think are coming that might help us be more successful in preventing disease rather than find a cure? Guest: Well, I think that's where we're working pretty hard on kind of the futuristic notion. Again, just saying you should eat this and you should exercise that and everybody getting the same prescription, that's got to be wrong. Because that doesn't take into account different nutritional, different types of exercise for an individual. Lifestyle the same for all people is another poor notion. But to truly prevent illnesses that people will be destined to get, even if they have a healthy lifestyle, we've got to get much more information. And that might not from wearable sensors. So that's why we've put a lot into our program at Scripps where we actually are using nanosensors that can pick up a genomic signal. So whether that be from a free cancer DNA, before a cancer has really taken form, whether it's from a cancerous cell that's gotten into the blood, or for the immune system that's been activated, again, that signature in the blood; or a cell that's coming off of the lining of an artery that's going to be the beginning of what would be a crack or heart attack and hooking that up to a sensor that talks to your smart phone. That's when we can really get into the big time prevention. Or an asthma sufferer. To prevent the even first asthma attack--and you probably know, Russ, in children this is the number one cause for going to the emergency room, asthma attacks; and they can be deadly. We don't want any child to have an asthma attack, no less die of one. But we can predict that now with various metrics, predictive analytics, through a cell phone. And that could be not just with the child, but obviously also with the parent. So, being able to prevent things like an asthma attack or heart attack, or cancer--this is really where this newfound, granular information, panoramic information on each individual, can help. Some day, that will click. Russ: Well, some of it's already there, right? Some of that sensor technology has been approved by the FDA, if I remember correctly. Guest: The heart cardiogram, yes. The digitized pills, yes. But we've got a long ways to go to get these embedded now sensors in the blood. There isn't an asthma--there's an asthma sensor approved that's to tell you hot spots for asthma attacks in a community, geographical location. But there isn't one to tell from your own metrics yet that you're heading towards an asthma attack. And we're talking about before anyone has wheezing or shortness of breath, to know they are going to have an asthma attack. We're in the early stages. Russ: You think we are really going to find out that for some people lying on the couch and eating french fries is really what's good for them? Because you say that having lifestyle similarities is absurd. I'm sympathetic to that claim. But we do have lots of things in common, so you'd think that there would be some general rules. Eating broccoli, say, or whatever it is. Even though we should be skeptical about average medicine, there are likely some things that are, on average, good. Guest: Yeah. You're right. I'm not debating everything. But I don't think everybody has to do the same type of exercise and eat the same food. Russ: The same length of time. It's 27 minutes of your heart at this level, and then you are not going to die. Congratulations. Guest: Yeah. No, I think that some people are better suited to live their life really thing. Because even a little extra weight will have a lot of extra issues [?] for that. Whereas some people don't need to exercise their brain out. They just need to do walking. This whole idea of prescribing the same everything overall, I have a problem with that. It transcends lifestyle. I mean, I think we're talking about: How do you prevent a specific illness? Like, you have a risk for melanoma, you really have to gear up for sun protection. If you don't do that you are really going to change your odds of having that. We need to know that at the earliest possible time so that when kids are growing up, these, most chronic illnesses have their roots during childhood and adolescence, if not even before. So that's why we really have a new power of prevention. |
| 38:44 | Russ: You mentioned sun exposure. So, I'm going to have to ask you: I'm very Vitamin D deficient. Which, my physician said I should take megadoses of Vitamin D. Which I did not. A common phenomenon in the world, as you mention--many people do not take their meds. I thought it was not such a good tradeoff. Do we know anything about Vitamin D? Because a lot of people now spend a lot of time sitting in an office, not getting any sun exposure, not going outside, lathering on sunscreen and they are not getting any Vitamin D from the sun. Is it a crisis? You hear that it is. What's your reading? Guest: Oh, it's been terribly overhyped. There are some relatively unusual circumstances where Vitamin D should be taken. But the levels for an individual are not really known. There is a natural Vitamin D activation from being outside that isn't necessarily used, but most people are not Vitamin D deficient. And this has been kind of a frenzied thing whereby a lot of studies recently have really shot that down as to whether it's important. We've been kind of going through this Vitamin D fad of taking it and testing it and whatnot. So, that's just one on a long, long list of things that need to be individualized. Russ: Another example that comes to mind that I don't think you talk about in the book is hormesis, the idea that most things that might kill you are good for you in small doses. So, wine being an obvious example; at least some people argue that a glass of red wine is good for your heart, a glass a day. Certainly a cask of red wine a day will kill you, most of us. But I wonder, since we don't know where that level is for most of us--you should probably stay away from arsenic, lead, other things that are clearly toxic in fairly small doses--but it does raise the possibility, this individual medicine idea, that some day I'll know better where my threshold might be. Is that imagineable? So that therefore I could take my arsenic pills in the morning, because they help me think better-who knows what the benefits might be--but most things that are toxic are helpful in small doses. Is it possible we'll get to that point, where I'd learn where my cutoff is and take a chance? Guest: Yeah. Eventually. It's going to take a while because it's not on the high priority list to define it. But no question. This will be worked out some day. A good example is mercury exposure through seafood. There are a lot of different seafoods that people eat. And some people, if they get a level of that, any level, could be really deleterious. Whereas others, they are going to be fine. There's many examples of these things. Radiation is a great example. Some people, you could send them for scans, CT scans, PET scans, nuclear scans--they could go every week and they'll never get a cancer. Whereas other people are exquisitely sensitive. And we need to know who they are. I'm not suggesting that some people should have scans frequently--in fact, that's one of my pet peeves, that we overcook that. That whole controversy with do cell phones cause brain cancer? I suspect that they do in the rare individual who is already exquisitely genomically sensitive. But it's so rare that we haven't endeavored to find it. So this whole thing about toxicity, whether it's things that we ingest or are exposed to in our environment, we need to work on that. |
| 42:46 | Russ: Let me bring this around to an economics example that we've talked about before on the program when I talked to Gary Taubes. We talked about the strange parallels between macroeconomics and epidemiology, which are that you have a very complex system, you have a lot of causal agents, and it's very hard to tease out the independent effect. And I think some of the hype of so-called 'big data' is overly optimistic about our ability to single our or measure with any precision these kind of effects that might be of concern to us. So, just to take an example, Taubes has advanced the view that there's a nexus between insulin production, diabetes, heart failure, obesity--that those are not three separate problems; they are one problem, they all come from insulin miscalibration, etc. It's an interesting idea; it's provacative. I think all of us as human beings have an urge to know. So we say: That could be it. Of course, it could not be it, too. So, I'm curious. Where do you think are the limits to these kind of advances that we are talking about? Or do you see any at all? Because I wonder. Guest: Yeah. I don't really--let's go back on your question for a second because I'm just blanking on a response. Russ: Let me try to rephrase it. There are a lot of things that we'd like to know about, say, the relationship between exercise and longevity. Between diet and longevity. Between--those things and quality of life. And it's nice to think that given enough time and enough data we'll figure that out, not just for the average person but for each of us. But a part of me says: You know, we've been trying to do this in economics for about 80 years, and I don't think we've gotten very far. Complexity is not our strong suit statistically. And maybe we should be more realistic about what we are going to understand. Guest: Well, yeah. But going back to the kind of Taubes concept that all these diseases are linked--I think that in part that's true. But what we are learning is that in any given individual--let's pick diabetes, for example. This inane idea that there's two types of diabetes, when there's more than 20 types. When you look at it from a molecular basis--which genes, which pathways. So what I'm coming back to you now is that we are now starting to understand this pathway approach, and I think we can break this thing down. And you alluded to this 'big data'--well, obviously we have an enormity, a torrent of data like we've never had before, but we have supercomputers, we have analytical capabilities, predictive analytics and machine learning like we never had before and just getting better every day. So I actually think we can get into the nitty gritty here, and override some of the inability that you are getting at in the future. I'm quite optimistic about that. No one would ever have thought you could sequence a whole genome with 6 billion--to do it 40 times, 240 billion data points--and be able to analyze that in minutes? Who would have thought that would be possible? Russ: It's very cool. But again, we're human beings. We have a problem with hubris and overconfidence. I look at the financial sector where people build all these complicated models and they actually think they know what they are doing. I don't think they are incentivized to know what they are doing. And that could be a problem in medicine also. I look at the examples that you give in the book of evidence-based medicine, where people--they think they are doing science, but they are doing what Hayek called 'scientism'. It's--they are fooling themselves. Guest: Yeah, you are making a very good point there. And time will tell whether we can override those concerns. I think it's a legitimate issue and only when we have proof can we really respond to that concern. |
| 47:10 | Russ: So, one of the problems--and this is a huge topic so we'll just touch on it because I have other things I want to talk to you about--I think in medicine is the lack of competition. It's hard to start a hospital. Very hard. John Cochrane on a recent episode of this program talked about--you, I think you started a medical school. Which is hard to do. Guest: Yes. Russ: Incredibly hard to do. The system is designed to make it difficult on purpose. Now, there's good reasons used to justify this; but there are some really bad reasons. Like preserving one's own well-being in the face of creative destruction. So, you talk in the book very eloquently about how archaic some medical school curriculum is, how resistant medical school curriculum is to introducing topics like the ones we are talking about. Do you see any hope that these phenomena could be made more competitive? Or maybe more realistically that we could somehow do it end around? As some patients do around the system--they teach themselves, they don't rely on the doctor. Guest: Yeah. You have hit on another biggie here. What I'm banking on because the systems are hard to change, and the medical school--you bring up a major painful point there. And at that time--this is back in 2002--there hadn't been a new medical school in over 20 years in this country. Now there's a whole bunch of them. But the issue is that the power of the people is greater than the people in power. Right? Russ: No. Guest: And so we do have an opportunity now. Yeah, yeah. We have an opportunity like never before of, in the social networking era--when you go back and you think: Look what happened in HIV. Talk about a difficult problem of people dying. And it was activism. We didn't have social network systems then. It was just people parading and storming into Congressional offices. And that led to definitive treatments and maybe even we are talking about cures and vaccines now. Tremendous progress. Not a fatal disease by any means. Well, if we had that across the board in medicine, wouldn't that be extraordinary? We can take activism now, it's exponentially more powerful. So, if we could get people activated--that's actually why I did the book, is because I thought that if everybody knew about this who was willing to delve into the book and get activated, maybe we could rally and undo some of the problems we have of making these very deeply seated, difficult-to-change systems, make them much more maleable and progressive. Russ: Let me ask you about one of them. A little trivial, somewhat trivial, but maybe it's symptomatic of the problem in general. My doctor, and I'm sure this is not uncommon, seems less eager to prescribe antibiotics than I am to take them. I'll call him, or sometimes I have to go see him about a problem I have; and it's one maybe I've had before. I'm pretty sure I know what it is. If I'm on the road he'll sometimes phone in an antibiotic, but sometimes he'll make me come in. Now is that because I'm ignorant? I think antibiotics work better than they do? And he's protecting the public from overexposure, our public health system from overexposure? Is he trying to keep me coming in so he can make the money from the call? That whole system is weird. We don't do that anywhere else. If I go and I think I need a new something for my car, I just go do it. If I'm capable. But it's a strange world. Guest: Right. It is a strange world. And there's a lot of answers to your question. One of them, of course, it is incumbent on physicians to be less promiscuous with antibiotics because that's what led to all sorts of problems of resistance. We've now learned in recent years how it's had drastic influence on our microbiomes, and that has its own risk for diseases, no less intrinsic DNA. But the other thing you are getting at is the self-care of the future. And that is, as we have data that's widely accessible, and information, to the consumer, to the individual. And let's say you could validate what infection you had and what it was, and what antibiotics it was resistant or sensitive to, prove whether it was an infection with a dipstick thing. Or whatever it was. An ear infection, you name it. You could then have an algorithm that goes right to your phone that tells you what to take, and that, once it's validated, should give you the leeway to be in charge. And you should have full access to whatever that medicine should be. And I think that's where we want to be. We want to fully democratize. The day is out there, once we prove that is the right way to go, better model of medicine, that's how I see going forward. Russ: That's a beautiful idea. So, I guess the analogy would be, when I have the earache, I hold my cell phone up to my ear. I put this little attachment in, maybe, and he gets to look on the screen in his office to see how inflamed it is or whatever else might give him information, and then he's comfortable letting me have the antibiotic. Or, I don't have to go to him. Guest: You don't have to go to him. It could be your child, too, more likely to have the ear infection. You get a tenfold high-resolution image of that eardrum, which is through that addin to your phone. That goes to an algorithm, and you get a text back, yes or no on the ear infection question. And then you could either call and say I have a confirmed ear infection, where physicians some day trust that without having to see you or your child and call in the prescription. Or someday, going a little step beyond that where that algorithm is so good and this is down pat that you just get a ticket to get the prescription. In fact, not only do you get the text back that there's an infection but you also have the medication--either you are downloading it directly from the Internet or it's already available to pick up from your local pharmacy. Russ: Yeah, well I interviewed Doc Searles a couple of weeks ago about what he calls the 'intention economy.' So, I'd send out the picture of my ear and then a bunch of pharmacies would offer me some good deals on the best drug for it. I wouldn't even have to search. Guest: It's coming. |
| 54:28 | Russ: You've spent a lot of, played a lot of different roles in the pharmaceutical industry's discovery process, been on panels evaluating drug efficacy. You got entangled in the Vioxx controversy, which we might talk about in a minute. We had Marcia Angell on this program a while back and she sees the industry as basically totally corrupt. In fact not just pharmaceuticals and drug approval, but the entire nexus betweeen physicians and the drug device and pharmaceutical industry. What are your thoughts on that, those tensions there? Guest: I think Marcia is an extremist. I know her and I respect her, but I believe that there is an imperiled pharmaceutical industry because of lack of innovation, lack of individualized medicine embracement. I think they will start to get on this now because the whole blockbuster model of mass medicine, those days are over for good. So I'm seeing a real transition, a real notable change in the attitude toward using genomics, sensors, other tools to develop new drugs that are much more effective, that aren't helping 2% of those who take it, but hopefully most people. I, in the book, wrote about I want to see a guarantee to succeed model. I mean, you made the analogy of buying something as a consumer and if it didn't work, you take it back. You want your money back. I want to see that for drugs. I want to see: It doesn't work, then I'm not paying for it. That's where we need to be. And especially with the costs of these drugs. You know, there is a drug that's now a million dollars a treatment? There are drugs that are hundreds of thousands of dollars per treatment. Per year. Cystic fibrosis--if you are fortunate enough to be a child with a specific mutation that is sensitive to the new drug Kalydeco, it costs $294,000. A year, for the rest of the person's life, till something better comes along. I mean, this is ridiculous, these costs. That should be guaranteed to succeed, and even then it's too expensive. Russ: There's a complicated set of issues there about regulation, property rights, patents, FDA approval stuff. Guest: There's one thing, I can make it simple: somebody's making a lot of money out of that. Russ: That's true. But I think what your example, your description of the pharmaceutical industry moving away from mass medicine, I have two thoughts, which echo your opening chapters. One is: That's like cable TV. Instead of three channels producing shows that are on average popular, we get 100 channels producing shows that a lot more people love. And then the other example is the long tail, that Chris Anderson insight. He's been a guest on this program, talking about that. And you refer to it at the beginning of your book. In the digital world, very small niche markets get served magnificently which would never have been served in the physical world. Isn't one of the barriers to that in the drug industry the cost of approval and the requirement to prove efficacy? Which you point out isn't so efficacious for a lot of people? It's not a very good system. So, that's my rant. You can react to it or you can say what you would do to make it better. Guest: I think that the drug development woes were when there was trying to develop a drug that you could essentially give to everyone. Put in the water supply. But when you are developing a drug for a specific mutation, that's a whole different look. Now you've got the biologic basis and it can be done precisely and quickly. And it can also be fast-tracked through the FDA. So your time to market is reduced; your time, the number of patients needed to show overwhelming efficacy is trivial. And in addition, if you have overwhelming efficacy, if there happens to be a side effect, the benefit-risk ratio there is so favorable. So, my response to that is we are the long tail of pharmaceutical development that you are kind of getting at, is well suited--it could be an ideal model. And what's fascinating is once you have a drug that works on a specific pathway and mutation for something rare, it could turn out that it helps a lot more people than the ones who have that rare mutation. So, I think this is a model that's going to start getting popular. It's very different than the way we all conceive of pharma in the past. Russ: The system is not designed to make that easy. And it's partly not designed to make that easy because big pharma likes the current system. They are really good at compliance; they are really good at FDA testing, and they have something of an oligopoly because small competitors can't absorb those large fixed costs that FDA approval requires. So we are going to have to move, to get to your world of innovation, to get to a world of much more tolerance in that industry. Guest: That's right. I totally agree with you. |
| 1:00:25 | Russ: Well, we're out of time. Let's close with a little bit of poetry--not the literal kind but the kind that makes your heart feel good. And I don't mean your physical heart--I meant your spiritual one. Your book is an incredible catalog of both the current state of medicine and where it might go. What gets Eric Topol the most excited out of all that? It's an incredible time to be in your field. I've got an 18 year old son who has got scientific leanings; I'm encouraging him and have been for a while, partly because of your book, lately, but also because of previous conversations--Freeman Dyson said if he were a young man he wouldn't go into physics, he would go into biology. Because that's where the action is; and he thinks most people feel that way; they might be wrong. But for you, what do you think is the most exhilarating part that's yet to come? Guest: That's a great question. I do think--I wish I could go back and be an 18 year old or be a medical student now. The most exciting time is of course going to be in the future. The thing I've worked on most in my life, from a research standpoint, has been preventing--treating heart attacks. But the dream of being able to prevent one, the sense that it was coming days or weeks before and gearing up so it doesn't happen, that to me as a singular project is the most exciting. But as an overall landscape, the idea that we will finally be able to recognize each human being, digitize what makes them tick, and render specific treatments and preventions for that individual at the doctor level, at the life science industry level--that to me is exhilarating. I can't think of a more ideal way to move forward and transition from this kind of horrible mess economically and with respect to the overall benefit/risk balance we're in today versus where we are going to go when the future, which will be so much more precise. Eventually we will get there. It just is a matter of time. |
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| 0:33 | Intro. [Recording date: March 19, 2013.] Russ: I know you are working on a book on the basics of monetary policy, and I wanted to tap into that as well as discuss some recent posts at your blog, The Money Illusion. So we are going to talk about the basics, and ideally we'll get, toward the end, to the interaction between monetary and fiscal policy, and why you are so skeptical of some of the claims of Keynesian supporters in discussing the stimulus. So, I want to start with some very basics, though. You recently wrote that it's hard to argue that the business cycle is caused by real shocks. And you gave some historical examples. Why is it hard to argue that real shocks cause recessions and unemployment? Guest: Well, first of all I should say that I'm talking about countries with large, diversified economies. Like the United States. If you have a very, very small economy dependent on like one agricultural product, obviously a real shock could make a bigger difference there. Russ: Like a bad rain season, a drought. Guest: Yeah, exactly. And also, I'm focusing more on employment fluctuations than Gross Domestic Product (GDP). You could measure the business cycle either as fluctuations in real GDP or fluctuations in employment. And in my view it's fluctuations in employment that are really the key stylized fact about business cycles. We think about the mystery of a depression--why are so many people unemployed when there's lots of things that need to be done and the people want to work, and so on? So that's I think the biggest mystery that needs to be explained, big fluctuations in employment. And I don't think real shocks can do that in the United States, by and large--can cause large fluctuations in employment. I think they are basically nominal or monetary shocks, although not necessarily changes in the money supply per se, but some sort of failure of monetary policy to keep nominal spending growing on a steady path. And as far as the historical examples--yeah, in the blog posts I mention just a few things that people need to think about. I remember the 1987 stock market crash, and there was a lot of talk at the time of how similar the 1929 crash, going into a recession. Not only was there no recession--there wasn't even a tiny slowdown in the economy. Not even a blip. And I think one of the things that points to is--I don't think that something like a stock market crash by itself would cause a recession, unless it was accompanied by a failure of monetary policy. I mention the Japanese tsunami--it had almost no impact on the unemployment rate in Japan. Doesn't show up at all. These are big shocks. That's the biggest natural disaster to hit a developed country probably in my lifetime. And the 1987 stock market crash was certainly the biggest crash over a short period of time--a period of about 6 weeks, I think the stock market lost about 45% of its value, something like that. Russ: Those are just two examples. So I guess the next thing to do would be to look at the big swings in unemployment and ask whether they were preceded by a supply shock. And it's hard to see what those would be. Guest: Well, one thing some people point to is the energy shocks. And in my view it's a little hard to disentangle the monetary aspects and the energy aspects of the 1970s. We know that monetary policy was to blame for the high average rate of inflation during the 1970s. But the energy shock certainly created some variation in the inflation rate. But even there, I think monetary factors were probably the biggest problem, in terms of fluctuations in employment. There were certainly lots of other things that made the economy less efficient, like price controls and so on. But I don't think those are as important for the business cycle. Let me also point out, especially for your listeners that are sort of free market oriented, like myself: I think there is a tendency sometimes to engage in wishful thinking. If you don't like a lot of bad government policies that are happening at the time, your tendency is to attributed economic distress from the business cycle to those bad policies. But we had, under Lyndon Johnson, an enormous increase in the size of the scope of government, and yet the 1960s were a boom decade. So, in the long run some of those policies come back to perhaps hurt us in terms of efficiency; in our medical care system; and so on. But I don't think there's much evidence that that sort of thing really explains the business cycle to any great extent. Russ: And you also mention, which I think was a nice point--I think it's often forgotten because people don't pay careful attention to dates--that the collapse of the U.S. housing market between 2006 and 2008 was not followed by a sharp rise in the unemployment rate. Guest: Was not accompanied by. Right. So, if you take the peak of the housing boom--was about January of 2006, unemployment was 4.7%. And then 27 months later, in April of 2008, housing construction had fallen in half, but unemployment was still 4.9%. Which is really a very low rate. And the reason for that is: The rest of the economy is doing fine. So as jobs are being lost in housing construction, we are picking up jobs in commercial real estate, in exports, manufacturing, services--all sorts of other sectors. But the overall unemployment rate wasn't changing that much. I mean, GDP growth was slowing a little bit; but it was still positive. And then in the second half of 2008 when nominal spending fell very sharply--in fact at the sharpest rate since the Great Depression--that's really when it spread to other sectors: commercial real estate, manufacturing, services. All of them started losing large amounts of jobs. And that's when unemployment doubled from 4.9% up to 10%. So, I think that if you look closely at the data you find that even a sizeable sector for the economy--like residential real estate, which was 6% of GDP at the peak--a decline in that sector really isn't enough to create a recession. If you have stable monetary policy that keeps nominal spending growing at a slow but steady rate. |
| 7:23 | Russ: It just comes back--the way I think of this puzzle of the labor market and its variability and how hard it is sometimes to find a job--in the 1990s, if you got laid off or got tired of your job and you quit or you were a senior in college going out on the job market, there were lots of jobs. And that was true up until about 2001. That being laid off or quitting was not a traumatic experience. It's not fun, but you were pretty confident--I think most people would be confident in those times. True in the 1980s as well--well, I'll find another job. But right now, it doesn't feel that way. And I don't think it is that way. Something is different. Guest: Right. And I think--I attribute this to the nominal spending or nominal GDP shock that hit us in 2008 and 2009. Over a 12-month period we had a 4% fall versus a trend rate of 5% increase. So really our nominal GDP growth was about 9% below the trend between mid-2008 and 2009. And that just had a devastating effect on the job market. I like to use a metaphor of a game of musical chairs. So if you visualize that--if you have 100 people and 100 chairs, everybody has someplace to sit down. But the music stops. Russ: It might take a while to find them sometimes. They might not be in a neat circle. Guest: Right. Russ: But they are around. Guest: Well, yeah. That's a nice supplement, because that fits in to how the job market does have this information problem, search process. But they eventually do find them, usually fairly quickly. Now if you suddenly take away, say, 4 or 5 chairs, then a bunch of people are going to be sitting on the floor. And the way I look at the job market is that nominal wages tend to be kind of sticky or slow to adjust. So, when there's less total spending in the economy, or total net nominal income in the economy, but people are paid about the same amount per hour, there's going to be fewer hours worked. And that's your recession, basically. So you have roughly the same pay per hour, a smaller amount of total money circulating, expenditure in the economy--that is, a smaller amount available to pay workers--there will simply be fewer hours worked. Russ: Instead of the alternative--that wages would fall and people could keep their jobs with smaller hours. Guest: Right. But that really doesn't happen very smoothly. It certainly happens in some sectors. You can find really hard-hit sectors where workers have taken pay cuts. But there are many, many sectors that are quite large--like my own, where we haven't had any pay cuts at all; we've just had a slowdown in the rate of increase. I think, not just education but health care and many other sectors that aren't hit as hard have relatively inflexible wages. And so the overall wage level in the economy does not adjust when nominal spending grows 9% less than trend over 12 months. What we've had since then is some adjustment in wages, and as the adjustments occurred, the unemployment rate has slowly fallen from 10% at the peak to 7.7%. So you could say maybe it's halfway back to normal. And I think that along current trends we would probably see further adjustments in wages, further slow growth: we're seeing 2% growth in wages instead of the normal 3 or 4%; and that is gradually healing the labor market. But it's healing it more slowly than if we'd had steady growth in nominal spending. |
| 11:01 | Russ: So I need to ask some clarifying questions. It's slightly embarrassing. Well, it's embarrassing in lots of dimensions--because I've had you on before and I've probably asked some of these questions before. But I like to think I get a little smarter as the months go by--not always. That's the EconTalk Illusion, maybe. But anyway, when you say that nominal income or nominal spending--first let's clarify for some listeners: That means denominated in some actual dollars. Not corrected for inflation or anything like that. So when the total volume goes down--you know, you are talking about it like it's an independent thing. Isn't that just a different way of saying we're in a recession? It sounds like you are saying that recessions-- Guest: Oh, good question. I get that a lot. But that's actually not the case. Because--okay, a couple of examples. We all know about the big hyperinflation in Zimbabwe, recently. Or in Germany earlier on. Now obviously their nominal GDP was going up dramatically. And yet if you look at the real side of the economy in Zimbabwe it was doing very, very poorly. You could probably call it a recession. So, I don't think that you can simply look at ups and downs of nominal GDP and say: Well, that's automatically a business cycle, so that I'm just talking in terms of a tautology. A lot of people think that when I first explain that nominal shocks cause business cycles. And they say: Well isn't a shock in nominal GDP just a recession, so-- Russ: It sounds like you are saying a recession causes a recession. Guest: Right. It sounds that way. But actually a recession would be better described as a fall in real GDP. And nominal GDP I think is better described as a stance[?] of monetary policy. Now, it is true that in the long run these two are sort of independent of each other. So, printing money doesn't really in the long run make a country richer. And reducing the money supply probably does not make it poorer in the long run. But what happens is, because wages and prices are sticky, you get these short term cyclical effects from fluctuations in nominal GDP. So, if you believe that this correlation is very strong--and your question actually presupposes a stronger correlation than even I'm claiming. So, you're sort of saying: Aren't real and nominal GDP always closely correlated with each other? And I would say to that: Not quite always. There could be hyperinflation where a breakdown, or there could be such an enormous real shock that you could have a fall in GDP, real terms, even without a fall in nominal. That could happen. And it does happen in small countries. But what I would say is this: For the United States, yes, they are so closely correlated that that raises the question of then: Could we then smooth out the fluctuations in real GDP by smoothing out the fluctuations in nominal GDP? And then the second part of that question is: Can monetary policy deliver slow but steady growth in nominal GDP? Russ: Yeah, those are the two key questions. Before we get to those, let's do a little bit of history of economic thought. Very recent history of economic thought, the last, say, 60 or so years. So, we go back to the early work of Milton Friedman. He would argue--I think he argued that the quantity of money in the short run had real impacts on the economy. I'm rephrasing, I think what you just said. In the short run, it could have real effects. And in the long run, it had very little. Or, it could be destructive; but it was intended to work through the nominal values, through the prices, not through real output changes. And inflation in and of itself can be destructive to decision-making, so that's the sense in which it can have real effects. But what he really was saying is that short run effects of money are real and long run effects are only nominal. Is that fair? Guest: Yeah. And my views are very similar to Friedman's in many respects. And the one difference would be that he focuses more than I do on the actual money supply. I focus on what is sometimes referred to as the money supply times velocity. So, some of your listeners may have seen the famous equation of exchange, MV=PY. And the total spending in the economy is the amount of money in the economy times its velocity of circulation. So, the early monetarists like Friedman tended to assume that velocity would be fairly stable if monetary policy was stable. So, they just had M grow at 4% a year, that would keep total spending at a pretty stable path. Russ: Because V would be stable. Guest: Right. Russ: And then PY, the nominal value-- Guest: The other side, which is the nominal value of income or expenditure, would be also stable. And our group--sometimes called 'market monetarists'--tend to focus instead of on the money supply itself on just the total amount of spending, M times V. And so what we're trying to do is we're not trying to stick to a steady growth path for the money supply, but rather adjust the money supply as needed to offset any changes in velocity, in order to keep that total spending path of nominal GDP pretty stable. And that's still sort of in the spirit of Friedman. It still has sort of the same goals. It has the same assumptions about in the long run money is neutral and it only leads to inflation and doesn't affect real variables. So, much of the structural model of monetarism is still there. It's this more modern version we're working with. But we focus more on total spending rather than just on the money stock itself. |
| 17:07 | Russ: Well, one of the virtues of that approach, of your approach, is that M--it's a nice thing to write down in print and a textbook, but what is it exactly? So, one of the problems with using the quantity of money to measure whether monetary policy is doing anything or makes a difference is it's hard to know how to define it and then how to measure it. The different measures of M--M1, M2, M3, M4, etc. And some people think that those have become outdated. The Fed doesn't even publish some of those any more. They are still collected by some under-the-radar folk. The puzzle for me, then, is: How do you know whether you are doing it well or not? Normally--this is a great mystery to me; I've asked many guests about this; maybe I'll finally understand it after you answer--but, outside of you and me, everyone else seems to think we should look at interest rates. So, if interest rates are low, then monetary policy is expansive. Expansionary. It's 'loose.' And this then leads to a conclusion by some people, mostly Keynesians, that monetary policy is ineffective, because it can't influence--interest rates can't go negative, so they're close to the so-called 'zero bound', which is just a way of saying zero. And therefore monetary policy is ineffective. Nothing is left. We have to turn to fiscal policy. We've talked about this before, but explain again why interest rates are misleading. And then if interest rates are misleading, what am I left with? Guest: Well, first of all let me just say that although you say everybody just thinks in terms of interest rates, you could almost do a very interesting study on why that is, because our textbooks say that interest rates are not a reliable indicator of monetary policy. And the head of the Federal Reserve, Ben Bernanke, says that interest rates are not a reliable indicator. And so on. And Milton Friedman said they aren't a reliable indicator. And so actually there's a long tradition in economics among even not just monetarists like Friedman but, again, in our textbooks; and Ben Bernanke is sort of a New Keynesian. It's not at all generally accepted that interest rates are a reliable indicator. Interest rates tend to be really high during hyperinflation; but nobody really thinks that's tight money. So, I think we have to start with a fact that, although when I started my blog and started talking about interest rates being misleading, it was somehow seen as a contrarian view. It really shouldn't have been seen that way. But for whatever reason, it was at the time. And then the other part of that is: interest rates really need to be seen as conditions in the credit market that reflect conditions in the economy. So, generally speaking there are two things that will make interest rates low. One is low inflation and the other is a weak economy. There are other factors as well, but those are the two main ones. And, obviously we have both right now. We have relatively low inflation and we have a very weak economy. So that's why interest rates are low. Interest rates tend to be high during the peak of a business cycle and they tend to be high when inflation rates are high, like the 1970s. So that's my starting point about interest rates. Then if you look at monetary policy, you've got this problem: A tight money policy is likely to do two things. It will make inflation lower. And a tight money policy will push an economy into a recession. Well, both of those things tend to reduce interest rates. Right? Low inflation and recession. So, Milton Friedman once said: Very low interest rates like in Japan--talking about Japan at the time--are a sign that money has been tight. And I know that sounds contrarian, but it's very much consistent with basic economic theory. Even to some extent Keynesian theory. Russ: So, how do you reconcile that with the fact that if you asked, I think, Ben Bernanke or most observers they would say that monetary policy has been wildly out of control and expansive? Guest: All right. Well, what I would do if I was asking Ben Bernanke is I would quote him from 2003, where he said that the only reliable way of looking at monetary policy is to look at the rate of growth in nominal GDP and inflation. That's what he said. And then I would point out that since 2008, those two on average, if you average the two, have been the lowest since Herbert Hoover was President. So, using his own words it's inescapable that money over the last 5 years has been tighter than at any time since Herbert Hoover was President. And then I would ask Ben Bernanke: Why have you now changed your views and why are you now saying money is unquestionably accommodative, when in 2003 the criteria you laid down suggest it's actually very tight? So I would put him on the spot. Russ: And how would he answer that? He's not a fool. He's a smart person. Guest: I don't know. I wish a reporter would ask him at a press conference. Quote him from 2003. Russ: In 2006 I asked Milton: Why is it if it's the quantity of money that matters--and again, you can debate whether we can measure it or not, whether there are offsetting changes in velocity, but Milton basically was a quantity guy--I said why does the Fed always talk about interest rates? And he said: It makes them feel better. It makes them feel important, that they are doing something; they are manipulating, they are steering the interest rate. Do you think Ben Bernanke got that disease once he got into the chair? Guest: No. Well, look. I think that it's a little more complicated than that. First of all, the Fed does have a short term impact on interest rates. And it is true that when they do an easy money policy, it's often the case that in the very short run, short term interest rates will fall. Sometimes long term interest rates go up at the same time, so it's kind of confusing there. So there's a grain of truth--obviously if there wasn't a grain of truth in it they wouldn't be talking this way. The other thing is, I think they overweight how important interest rates are to what is called the 'transmission mechanism.' So, if you ask the average person: Why does monetary policy affect the economy? Most people either wouldn't have a clue, or the only answer they would be able to give is: Well, if the Fed cuts interest rates it's more likely that I'll go out and buy a home. Or borrow money to start a business. Russ: That's what the business community, the business journals write over and over again. It's why they say monetary policy is ineffective: Interest rates are low, that discourages investment but they can't drive it any lower. But that seems ridiculous. Guest: Well, it is. Often people--people at some level know it's ridiculous, so they'll often say both things. So, in the Great Depression for instance the business community had two objections to easy money. One objection was: it's pushing on a string, it won't do anything because interest rates are already near zero. And the other was: Well, if Roosevelt keeps doing that we'll have hyperinflation like Germany had. So those were their two objections: they can't do anything and it does too much. Now, in case you think that's just the Depression, the Bank of Japan has said both things. They've said: Well, we can't do any more. And: if you force us to do what you are asking us to do, we'll get high inflation. Russ: And it's the same thing right now. Guest: It's a contradiction. |
| 24:58 | Russ: Let me ask you two more questions on this theme. Which is: So you are saying that monetary policy has been tight but not loose. The policy has been contractionary. Despite the talk. Despite the low interest rates. But you look at the Fed's balance sheet--it's gone nuts. Base money--base money, high-powered money--is so big. The Fed's been so active. There's been all this quantitative easing [QE]. How can you say that monetary policy hasn't been active or loose? Guest: All right. Well, let me point some things out. First of all, so your listeners don't think I'm completely crazy here, there's a pretty general consensus among economists today that monetary policy in the early 1930s was contractionary. That period of time when we had big deflation. This is Friedman's view, Ben Bernanke's view; the view in the textbooks. It's pretty widely accepted that the monetary policy was contractionary. Now, what you don't often hear is that under Herbert Hoover, they did QE--they did quantitative easing. When interest rates fell close to zero they started to do big open market purchases of bonds, in 1932. And between 1930 and 1933, the monetary base rose very sharply. Not as sharply as recently--but then, they weren't paying interest on reserves, either. That's one of the things that is a quirk in the modern system. All this money the Fed has supposedly been "printing" actually hasn't been printed. Almost all of it is an electronic entry in a bank, a deposit at the Fed that the banks earn interest on. Russ: That's a new-- Guest: And really what the Fed is doing is they are swapping one kind of interest-bearing liability of the government, called Treasury Securities, for another interest-bearing liability of the government called Bank Reserves at the Fed. They are just swapping one for another. If they were truly printing money, the supply of cash in our wallets would be going up a lot, like it did in the hyperinflation in Germany. Now that has gone up some. There has been some increase in cash in circulation. But that's really a reflection of the fact that when interest rates fall to zero and you can't really earn anything in the bank anyway, people do prefer to carry a little more cash than during normal times. But it's been a very small increase in actual cash in circulation. It's been mostly this reserve game they are playing of shuffling between two assets--Treasury Securities and Bank Reserves. Which are both interest bearing. Russ: But isn't that-- Guest: That's not printing money in the hyperinflation sense of Germany. That was not interest bearing. Russ: I understand. But doesn't your observation then just prove the critics' point? You are saying they haven't really done anything. Isn't that just another way of saying monetary policy is ineffective? They've done all this "stuff." It's just on the books; it's not real. And so monetary policy has had very little impact. What would you have had them done? Guest: They've done the wrong stuff. Russ: What should they have done? Guest: The way you have to think about monetary policy is sort of do the reverse process from everyone. Everyone thinks in terms of gestures and then waiting around to see if they succeed. The way you think about monetary policy, in my view, is you start with success and then work backwards and ask: What do we need to do? So, let's say the target is 5% growth in nominal GDP. So, you start by announcing you are going to do whatever it takes so that the markets expect 5% nominal GDP, [?] to occur. Whatever it takes. Even if you have to buy up all of planet earth. Now, you are not going to have to do that. In fact, if you announce that target you probably will end up doing less QE than we've actually done. So, the countries that have the most inflationary policies today, like Australia for instance, have the smallest amount of money printing going on. And the ones that have the most deflationary policies, like Japan, have the largest amount of money printing. Which I know goes against common sense, but it reflects the fact that when you expect faster growth of nominal spending, you don't want to sit on cash as much. So, the amount of printing of money the Fed has to do is really determined by what the public wants to hold. I'm going to back up because this is kind of hard to grasp. Let me give you an analogy with something your listeners may have heard about, like the Gold Standard. Let's take that as an analogy. Under the Gold Standard, the way it worked was the government would set a price of gold and basically say: The public can hold as much cash as it wants; it's up to the public; we will supply whatever they want in terms of bringing gold to the central bank and asking for cash. So it will be completely demand-determined. Does that make sense? Russ: Yeah, keep going. Guest: Okay. So, what you are doing there is you are targeting the price of gold and then letting the market determine the money supply and interest rate. That's a gold standard. Now, what I'm proposing is instead of targeting the supply of gold, you target something like a nominal GDP futures contract. Or at least you target market expectations. So you say: Look, we're going to watch the markets and we are going to supply money until the markets expect nominal GDP growth to be at least 5%, if that's the target. Now, the next question I always get is: How much money would they have to print? They've already printed so much. And it hasn't done much. My answer would be: It's very possible they'd have to print less. Because when people expect faster growth they have less incentive to just sit on cash that doesn't earn interest. Russ: But you are assuming-- Guest: By the way: I would stop paying interest on reserves, too. I would tell the banks: You are not going to earn any interest on reserves. We are going to get faster growth in the economy. If you want to sit on that cash and earn nothing, that's fine. We'll supply all you want to sit on. But we are not going to pay you interest on it. And instead we're going to target nominal GDP. You'd find that banks actually wouldn't want to sit on as much cash if they expected faster growth in nominal GDP. |
| 31:39 | Russ: I agree with all that. The problem is that you assume--and you may be right, but you may not be right--that the promise is credible. You assume that because Ben Bernanke and our imaginary world in 2008, instead of doing what he did he had said: We're not going to let nominal GDP fall. We're going to make sure that it grows at, say, 5% a year. You're assuming that people would say: Oh, I don't want to hold money and have it just sitting around. I'm going to invest it. But maybe the reason they are not investing it--and by the way, Scott, I'd love to believe what you are saying; I think it's lovely. It's got a certain aesthetic appeal to it. But it could be that the reason they are not using that money, the banks, is the economy stinks. There are not many good, attractive investments. And so Ben Bernanke can talk all he wants; he can try to change expectations. Guest: Yeah. Russ: How do we know he can change them? Guest: Okay. I've got three sort of interrelated answers to that. One is there's really no example in all of human history of a fiat money central bank trying to inflate and failing because of the lack of credibility. That would be my first answer. My second would be: There are techniques that can be used to sort of lock in credibility. Now Roosevelt used devaluing the dollar against gold. I would not suggest that today because gold doesn't play the same role in the economy. I've talked about nominal GDP futures markets. But even if they don't go that far, it's surprising how little the central bank has to do to change expectations. Not how much. Let me give you an example. Over the last, say, 3 months, the Bank of Japan has not even come close to doing what I'm proposing. They are sort of being dragged kicking and screaming into a world of a 2% inflation target. In fact, they don't want to do that. And the government is trying to push them in that direction. I would actually want the central bank to enthusiastically endorse a 2% inflation target, because that would be far more credible. So even in this worst case of Japan, where you have a dysfunctional central bank that's not cooperating, isn't doing the right things to create credibility, what they've been able to do is, in 3 months, depreciate the yen dramatically--and we've seen the market respond to specific announcements coming out of the government on monetary policy. So, we know they are linked. Speeches by the new Prime Minister, and so on. Stock market's up, what, 45% in the last 3 months. Phenomenal increase. And again, the stock prices have been strongly linked to various public statements from the Administration there proposing a higher target of 2%. First, as you know, they've had mild deflation in recent years. So, here's a case of a central bank doing far less than I would ask them to do, in a situation where I would even be doubtful if it would have any credibility, given how little enthusiasm they have for this. And yet the markets seem to have treated it very seriously, and actual exchange rates and stock prices and other variables have moved very strongly in just a hope that they'll do what the government wants them to do. There's no promise out of the central bank they are actually going to hit a 2% inflation target. Russ: So, let me restate my question. I'm going to say this in a different way. You are saying if the Central Bank of the United States, if Ben Bernanke had done exactly the same thing that he actually did--which was to buy up huge amounts of mortgage-backed securities from the balance sheets of banks, injecting reserves into the banks, which they now hold at the Fed--as you say; and they bought some Treasuries, too; those are just accounting things that they did. They increased the reserves that banks held at the Fed by buying up their assets. If they'd have done that and at the same time not paid interest on those reserves, and at the same time said they had a different policy--they wouldn't have had to do as much of it? And the economy would be healthier? Guest: Yes. Absolutely. I think that if they had had a more robust policy, especially back in 2008, a policy like the Australians had, keeping nominal GDP growth, at least long term, along a trend line, I think it's very possible--first of all, it's possible interest rates never would have gotten to zero. Because if your nominal GDP is expected to grow at 5%, your demand for credit is going to be much stronger. So, Australia, interestingly, was the one developed country that didn't have a recession this time around. Everybody else did, pretty much. And guess what? Their interest rates never fell to zero. Almost all the other countries saw interest rates fall virtually to zero. Now, if you really believe low interest rates were easy money, you would have to believe that the one country that had the tightest monetary policy in the world out of the developed countries somehow avoided a recession in 2009. In fact, what actually happened in Australia is they had a stronger nominal GDP growth track. A little higher than I would recommend for the United States, by the way. They've averaged, oh, sort of 6 or 7% nominal GDP growth over a decade. And it did dip a little bit, but then it came back. So they've been about to maintain that trend line pretty well. And as a result they actually haven't had to inject much money at all. There, what's called the monetary base--that's the money actually printed by the government plus bank reserves--it's only 4% of GDP in Australia. It's 18% here; 23% in Japan. So, the irony is, the central bank that has the most expansionary monetary policy, which is Australia of the developed countries, looks like it is doing the least. And it's actually doing the most. It has the smallest monetary base and higher interest rate. And the country that seems to be doing the most effort--Japan, which has had interest rates near zero for 15 years and has a huge increase in their monetary base, even larger than the United States--they've had deflation for 15 years. |
| 38:23 | Russ: But how do I know what's causing what? You've got to be arguing that in Australia, the Central Bank had this clear policy and everybody knew it was going to happen, so they didn't have to do as much. Whereas here, we didn't understand monetary theory, monetary policy, and we tried to just print the money without changing the expectations and so nobody believed it and it kind of just slumped along. How do you know if there were real things in the economy that were causing those changes? Guest: Well, there definitely were real things that caused monetary policy to go off course. So that's true. In other words, let's take the housing bubble, for instance. I'm not trying to argue that the entire crash of the housing bubble is due to mistakes in contractionary monetary policy. I think the second half of the decline, in 2008, 2009, was that the first part was due to, you could call it a real shock, and there's all sorts of theories about what went wrong with the housing market. I don't have anything interesting to say on that subject other than that when the crash did occur, it did tend to depress what's called the 'natural rate of interest'. So, one of the reasons that interest rates hit zero in the United States was what I regard as overly tight money that led to low expectations of nominal GDP growth; but another big reason that interest rates hit zero was that the demand for credit fell sharply with the crash of the housing sector. So, that was a real shock. As it pushed interest rates toward zero, we discovered that the Fed actually didn't have a Plan B for operating at zero interest rates. Even though Ben Bernanke, in his academic writing, said: Well, even at 0 rates the Fed can do lots of things, so it's not necessarily a big problem. But I think what we discovered is Ben Bernanke and the Fed are two different entities. So there's the academic Ben Bernanke that was telling the Japanese they should have done all these things at zero rates. And then there was the Federal Reserve, which is a big institution; it's conservative, it's hard to move in a radical way in terms of new ideas, new concepts. So, once we got to zero interest rates, it was almost immediately apparent, around late 2008 that the Fed really didn't have a backup plan. They had no plan for preventing nominal GDP growth from plummeting and staying--this is very important--from staying well below the trend line. They had no plan for getting a recovery in the economy, other than keeping interest rates low and crossing their fingers and hoping that would work, even though after 15 years it hasn't worked in Japan. Russ: But you make it sound like they are doing nothing. They weren't doing nothing. They were massively intervening in asset markets. They were buying up stuff-- Guest: You're right. So they did buy a lot of securities. And, I don't know how much of the failure of that to work was the reason that it didn't work in Japan, which was just bearish expectations, and how much of it was their decision to pay interest on reserves. It was some combination of things. Russ: Fair enough. Guest: And for whatever reason, it didn't. But they also did it in such a way that was almost calculated to fail. For instance, they said: Now, don't worry; we're going to pull all this money back out of circulation at the slightest sign of an uptick in inflation. Well, actually, you'd be better off when you have a severe slump of trying to get back to the trend line. And to do that, that's going to require inflation to be a little bit above 2% in the recovery phase, just as we had deflation between 2008 and 2009. But the Fed decided they wouldn't risk that. So they consistently told the public that they are not going to allow inflation above 2% until--and now I have to back off. A few months ago, they changed policy and said that they'll tolerate inflation up to 2.5%. And that's still not the best way of doing it. They should be targeting nominal GDP. But that policy change probably was significant. That does seem to have changed expectations a little about monetary policy going forward. And we'll probably get to that later as we get into the policy questions. But in terms of what went wrong back in 2008 and 2009, their big mistake was not to do what Ben Bernanke told the Japanese to do 10 years ago, which was do something called 'level targeting'--promise to get back to the same trend line that you left during the recession. |
| 43:18 | Russ: So, let me give you a different version of this story about how money matters. And it's a different story about the ineffectiveness of monetary policy. And that's Steve Hanke's. Which I associate in some degree with Milton Friedman's, maybe more than yours. And you can try to see where your story fits in with these other stories. If I have the story right. Which is the following. Hanke on this program a few episodes back said: Well, it's true the Fed has expanded the monetary base dramatically. But it's not been enough to offset the collapse in what he called 'bank money'--that is, I assume he was referring to the collapse of the shadow banking sector in 2008 and 2009. That this enormous reduction in liquidity as banks went either bankrupt or insolvent and had to be bailed out, as they pulled in their loans, as they deleveraged, as people stopped borrowing, as people paid off loans, that the money supply, properly measured--he uses M4--shrank. And although the government was very active, it didn't do enough. And similarly, you argued that the Fed was active in 1932 but Milton would say they weren't active enough. The money supply still fell dramatically through the early part of the 1930s. How does your story fit in with those stories? Guest: Well, it fits in very closely. The only difference is they look at the impact of the money actually produced by the Fed, which is called the monetary base and how it impacts the broader aggregates, like M2 or M4. I look at the money produced by the Fed, the monetary base, and how it impacts nominal GDP. But the basic story is essentially the same. All three of us believe that the money created by the Fed itself, the base, wasn't done in such a way that it stabilized whatever the target variable be. Whether it be M4 or nominal GDP. So, we just have a slightly different view on what's the optimal target variable. But the essential underlying analysis is very similar. Russ: But your--the difference, if I understand it correctly--is that in your story, it's the setting of expectations. It does seem kind of magical, Scott. It's not the actions that they took that failed; it's that they didn't talk about it the right way. Is that fair? Guest: Yeah, but talk is the most powerful action they have. The reason why is very interesting. Here's something people don't think about. What really matters is not what the Fed is doing now but what it's expected to do in the future. Let me give you a quick example. Probably your listeners have heard about what's called the 'quantity theory of money'--that if you double the money supply, the only thing that happens is you get inflation. Prices would double. Russ: Yeah, roughly. Guest: Nothing real would change. Everything would be twice as expensive. That's the quantity theory of money. But it only applies if the monetary increase is permanent. Because think about this. Suppose the Fed announced that we're going to double the money supply for four weeks, and then we're going to bring it back down to the original level. I don't think there's any quantity theorist on earth who would say: oh, the price level will double for four weeks and then it will fall back down to the original level. Because think about it: Would you buy a house that went up from $200,000 to $400,000 for four weeks and then drop back down to $200,000? Obviously not. No one would pay the $400,000. So, when you have a monetary injection, it's not going to have much effect on the price level unless it's expected to be permanent. And that means that what really matters when we set asset prices--house prices, gold prices, stocks, bonds--every asset out there is priced based on what people think the Fed will be doing in the future. Now they may not realize that. They may think in terms of vague phrases like confidence: Do I have confidence that the real estate market will be strong over the next 5 years? But they are really thinking about nominal GDP growth even if they've never heard that phrase. Or: Am I confident my income will be growing over the next 5 years? So what really matters is confidence in a stable but positive monetary policy going forward over a number of years. And that's why talk is the most important thing the Fed does. It's talk not just out of thin air, but talk about specific things the Fed will be doing in the future. And since the specific things they'll be doing in the future determine the value of asset prices today, that's the most important part of Fed policy. Signaling, communication, whatever you want to call it. And what it does this day, this week, this month is much, much less important than what it is expected to do 1, 2, 3, 5 years out into the future as a path of policy over time. Russ: I certainly agree that expectations matter a lot. Let's shift gears and we'll of course come back to this. Guest: That's what talk is about. It's about expectations. Russ: Right, but talk is cheap. And the question is whether you can talk in ways that are credible. You have to talk about you have to act in ways that make your talk credible. Guest: You know, they are very credible. The central banks a few decades ago said: Oh, we blew it back in the 1970s. Now we understand the Taylor principle, so we are going to start targeting inflation around 2%. And almost all the major central banks started doing that. And they basically succeeded in giving us an average inflation rate of about 2%. So people know that central banks, when they say they are going to do something, they know they can do it. And again, with the Japanese case very recently, we've seen very vague statements having an immense impact on Japanese markets. Which means people absolutely do pay attention to what the Central Bank says. Russ: Well, I think that's true. |
| 49:36 | Russ: So, I want to shift gears as I said, but it's really just a variant on the conversation. Which is that you wrote recently that Keynesianism, this whole idea that there's a possibility even of a fiscal stimulus, is a fraud. You said there's no evidence that the fiscal stimulus of 2009 had any impact, and you say it's scientifically empty, is how I would describe it. But you called it, I think, a fraud. What was your point there? Guest: Well, first I need to explain the underlying reasoning here. We have to start with the fact that during normal times, when interest rates are positive, almost all mainstream macroeconomists agree that monetary policy is the proper tool for stabilizing the economy, not fiscal policy. A lot of your listeners who may have studied Intro to Economics a few decades ago might have been taught that the Keynesians believe in using fiscal stimulus during recessions. Actually, that was abandoned by the late 1990s. The so-called 'New Keynesians' decided: No, the Fed should steer the economy with a 2% inflation target and we shouldn't use fiscal stimulus any more. The reason is very simple. Both of those tools are aiming at Aggregate Demand, or total spending in the economy. If you are already using monetary policy to get the optimal path of spending, then there's no possible role that fiscal policy could possibly play. You've already determined the path through monetary policy. So fiscal policy becomes completely redundant. It's also less efficient; there's long lags; Congress isn't very good at smoothing out business cycles; it runs up deficits. There's just all sorts of reasons that monetary policy is better for stabilizing the economy. Now, that part is not controversial. Here's where it gets controversial: When interest rates fall to zero, is there once again an argument for using fiscal stimulus? Paul Krugman and others say yes. Now, at zero interest rates there's a powerful argument for using fiscal stimulus because monetary policy is ineffective. However, Paul Krugman and others also say: Well, monetary policy actually could do a lot more if the Fed were really willing to be more aggressive; but they are just too conservative to do the things they really need to do. Therefore we need fiscal stimulus. And my response to the Keynesians is: Then you are sort of arguing for fiscal stimulus on the basis of incompetent monetary policy. Which is defensible. But if you look more closely at the Fed and ask in what way are they incompetent, they are not incompetent in the right way in my view to make fiscal stimulus work. Let me explain that. Russ: Fiscal or monetary? Guest: Fiscal. In other words, what I talk about is what's called a 'monetary offset.' The easiest way to see this is if fiscal stimulus really did boost aggregate demand, it would raise inflation. At least a little bit. Now, if the Fed is targeting inflation it will just tighten monetary policy to offset that. It will prevent inflation from rising and it will thwart the intentions of the fiscal stimulus. So, in order to make fiscal stimulus work, you need an incompetent central bank. You need one that isn't effectively targeting inflation. Or whatever goal variable it has. And instead just sort of passively lets fiscal stimulus move inflation up and down according to the whim of Congress. But I would argue that this vision the Keynesians have of monetary policy becoming passive at a zero interest rate is simply flat out wrong. Yes, the Fed has been too cautious; they've been too conservative to promote recovery that both Krugman and I would have liked to see. But they've been passive in a very specific way. Once we fell into recession, they were very clear in the sense of, like: This much recession and no more. So the Fed started to do very aggressive things every time the economy seemed to falter. First QE1. Then QE2. Then they did something called 'Operation Twist.' Then they did QE3. Then they did something called the 'Evans plan for signaling inflation and unemployment targets.' So they've done like at least five major unconventional actions that they adopted at various points when the monthly data seemed to show the recovery was faltering. And by doing all those specific actions they've been able to keep nominal GDP growth growing at about a 4% rate, pretty much regardless of what was happening to fiscal policy--whether it was expansionary or contractionary. It didn't make a lot of difference. And this year a lot of Keynesians said: Now we've had these tax increases; now the economy is really going to slow, because our models say that's a fiscal austerity. And at the beginning of the year I said no, probably GDP is going to grow just as fast in 2013 as in 2012, even though they've raised the payroll tax and they've raised taxes on the rich and they've cut some spending recently. Russ: Sort of. Guest: The spending is debatable. But there's no question at the end of 2012 they did enough fiscal tightening, according to the Keynesian models, to knock about 1.5 points off GDP. That was at least what I'd been seeing in the Keynesian articles. Now, we'll see how it plays out. But it wouldn't surprise me at all if GDP is just as strong this year as last year, because the Fed's actions, which were taken partly to offset this Fiscal Cliff, will essentially neutralize the effect of it. And by the way, you can find statements by people at the Federal Reserve pointing to the dangers of the Fiscal Cliff as one of the reasons for the fairly extraordinary actions they took late last year. Or at least actions that were sort of unprecedented in technique, let's say. I wouldn't say their actions were that powerful. But they were certainly a move in the direction of setting some explicit targets for the economy. And in my view the expansionary effects of that are probably large enough to offset the contractionary effects of tax increases. And if there are spending cuts with the sequester, which we'll kind of have to wait and see; but you're still going to get the same sort of growth. In fact, recently I've seen some articles suggesting growth is even picking up a little bit in the last few months. Which is exactly the opposite of what should have happened if the fiscal austerity model was correct. So, no, I don't think fiscal policy has an effect because I think the Fed neutralizes it. They have their own target. Russ: And do you think they neutralized the effects of the 2009 stimulus, then? Guest: That's a harder thing to know for sure. But here's the argument that I made recently. What if we had done no fiscal stimulus at all? So, you recall in early 2009 the stock market had crashed, unemployment was soaring, there were a lot of articles about another depression coming; the banking system was in severe trouble. Everything looked extremely bleak. The stock market was I think less than half of its current level. What if the government announced: Well, fiscal policy will do nothing to save us from a depression. Russ: We can't afford it. Guest: So, all the attention of the economics profession and the journalists and the pundits would have been on the Fed as our only hope. And they would have dug up immediately Ben Bernanke's writings that the Fed can prevent another depression. The Japanese should have done all these things. And we should have done all these things differently in the early 1930s. And they would start asking the Fed now: Why are you not doing the things that Ben Bernanke told the Japanese they should be doing? Like level targeting. Which to this day the Fed has not done. And I think the Fed would have been under enormous pressure. And I think Ben Bernanke himself would have wanted to do a lot more in those circumstances. Now, I can't say for sure but if the Fed had adopted something like a level targeting plan, which Bernanke recommended on the Japanese, I think that would have been much more effective than the actual policies they did plus the fiscal stimulus. We'd be today at a higher level of spending in the economy if Bernanke had done what he recommended the Japanese do about a decade ago. Instead of the actual policy of the Fed plus the fiscal stimulus. And I think it's plausible they would have done that because they would have seen the emergency we were in. Now, you can say that's speculative, and I perfectly agree with that. I can't be certain. But my point is: fiscal stimulus is not a scientific concept, because it's based on assumptions about Fed response, offset, that are completely hypothetical, psychological, mindreading. And they present these multipliers as if they are some sort of parameter of nature, like a scientific model. Which they are not. |
| 59:36 | Russ: So, I'm sympathetic to that view. And I'm sympathetic to your view. And I'm also sympathetic to what I would call a micro view of recessions. Which is not quite the same as a supply shock story. Let me just throw this out there and let you react to it. The Keynesians--I hate to call them that; I'll just say Paul Krugman and others who support increased government spending to help the economy--they argue that, well, something went wrong in 2008 and we didn't have enough spending; consumers lost confidence, businesses lost confidence; so government has got to step in and make up the difference. That's their story. Your story is--well, my story is: government doesn't spend money well; I don't have any reason to think that causes prosperity; and I don't assume that you can hold everything else constant while it does that and you just get a boost, in, say, nominal income. Your story is: Something collapsed in 2008 in the nominal side of the economy and the money side; the Fed should have tried to make that up; they sort of tried; they didn't do it effectively; they weren't credible; and as a result, we're in a slump. The third view says: All this macro stuff is just talk; there are real things going on underneath the economy. I recently interviewed Ed Leamer for a project I have called the Numbers Game, animated conversation shorter than EconTalk, where he says: manufacturing employment has been falling in real terms due to productivity and globalization--manufacturing employment not manufacturing output. Manufacturing employment has a long negative secular trend. Big decrease in number of manufacturing workers and so recessions aren't getting the bounceback they'd normally get if the trend were positive. Casey Mulligan on this program argued that we changed all kinds of incentives to keep them out of the labor market, and that's why unemployment is so high. How do I distinguish between these three different stories? The world is a complex place. As a Hayekian I like to admit that it's a complex place. As a human being, with natural tendencies toward thinking I understand stuff, I want to be able to say: Here's the theory. You claim to have the theory. Do you think it's possible in your coming book or elsewhere to make the empirical case that would convince skeptics? Of these other two stories? Guest: That's what I'm going to try to do. Obviously there's a lot to say there. I would say, the easiest one to dispose of I think is the secular decline in manufacturing. That's true, but it doesn't really explain the cycles. So instead of a straight line trending downward, which would be jobs in manufacturing, we have sort of a staircase downwards--big drops in recession, then level during the recovery, then big. You know what I'm saying? Picture a staircase going down to the right. Russ: Yeah. I think it's actually negative. I don't think it's so staircase-y. It's more intense during the recessions. Guest: Okay, maybe even slightly downward during the boom. But that doesn't really explain the cyclicality. It just explains the trend. Obviously over the long run we've been able to make up those jobs in the service sector. We had very low unemployment in 2007, as recently as that. And yet we'd lost millions of manufacturing jobs over decades. And before that, a hundred years ago we were losing millions of farming jobs, and people were moving to the cities. So, we constantly get this churning. But it's done in a gradual way that doesn't really by itself create business cycles. Now the Mulligan argument is a little bit tougher. There is a bit of truth in what he's saying. During the recession the incentives to work were reduced by things like greatly extended unemployment insurance. Almost two years at one point. Now it's a little bit less. So that probably increased what's called the 'natural rate of unemployment'--the rate that exists because of people being between jobs; they'd be a little more picky, be willing to wait a little more before taking that job because they could rely on more unemployment benefits. And other things like minimum wage could be mentioned and so on. But what I would say about that is that that doesn't really explain how we got into a severe recession. Because a lot of that was done in response to the recession. So there is a sort of entanglement between supply and demand for the economy. When you have very bad demand side policies and the economy crashes into a depression, the government reacts often in counterproductive ways and makes it worse. But still we have to prevent the cyclicality that causes that in the first place. One of my favorite examples was in the Great Depression. Or in the 1920s, the United States had a relatively free market economy. And as we went into the Great Depression because of mistakes made by people that today would be called 'conservative'--we had too tight a monetary policy, and a big crash in spending--we reacted to that failure of demand with counterproductive supply-side policies under, first, the later period of the Hoover Administration and then under Roosevelt, that made the recovery much slower than it needed to be. And Mulligan would have been pointing to those mistakes as to why we have such a slow recovery, and he would have been partly right. But I still think that the primary focus should be on stabilizing demand, because it's those demand failures that trigger things like the extended unemployment insurance in the first place. So that's kind of how I'd respond to the Mulligan argument. Russ: Are you a Keynesian? When you say, 'demand,' is there a difference between nominal and-- Guest: No, I use the term 'demand' synonymously with nominal GDP. Which is a little different from Keynesians. They don't. But I just feel that sometimes it's easier to talk about demand and supply shocks. Other times I use the phrase 'nominal and real shocks.' I mean that synonymously with supply and demand. But Keynesians define demand a little differently. They tend to think about it more in a real sense of how many goods and services are being bought. I tend to think about it in a nominal sense of like: What's the dollar amount that's being spent on goods and services in the economy? That's how I think about demand. Nominal GDP. Russ: So, my last question, which I should have asked you before: So, what happened in 2008? You argue that nominal GDP targeting is not a tautology. Why did nominal GDP fall in 2008? Guest: It was kind of a perfect storm of bad luck. So, I think you have to look at it in parts. Once interest rates hit zero, the Fed didn't know what to do. So then we want to back up and ask: Well, how did we get in that position? I think the end of the housing bubble is part of it. So, when the housing bubble burst and spending slowed very sharply, the natural rate of interest started to fall. It wasn't at zero yet; it was about 2% when Lehman failed, the interest rate. But it was falling very, very sharply. And in fact it should have been even lower. The Fed did not cut interest rates after Lehman failed, in their next meeting. It was still 2%. That was a mistake. And the reason they made that mistake was the other big problem, which is we happened to have this housing crash right at the same time as a huge oil price spike. So, because of the oil price spike of 2008, where gasoline shot up from $2 to $4 a gallon in just a couple of years, our headline inflation number was high; the Fed was frightened about inflation. So, even as nominal spending was slowing they were really grudging in easing their policy. So, by refusing to ease aggressively, they let the economy slide, partly under this oil shock and partly because of the housing crash. And by the time they realized, oops, we're sliding into a deep recession, interest rates had fallen close to zero and they didn't have their normal tool, their familiar, comfortable tool of manipulating interest rates to control the economy. And then we found the Fed didn't know what to do when it couldn't use its conventional tool of adjusting interest rates. And when the markets saw the Fed was adrift and didn't have a backup plan, the markets crashed. And that was the big crash in the second half of 2008, when markets realized: We are going into a deep recession, the Fed doesn't have a Plan B; it's going to be really bad. And the market forecasts were correct, by the way. The recession would be bad. Russ: Scott, it's always interesting to talk to you. You tell fascinating stories. And they could be right. I look forward to hearing more about them and I look forward to your book. |
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| 0:33 | Intro. [Recording date: March 12, 2013.] Russ: Our topic today is your book, The Great Persuasion, which chronicles the reemergence of free market economics in the aftermath of the Great Depression. Let's start with the state of that viewpoint at the end of WWII. What was the intellectual situation for free market economics and free market economists? Guest: What I found about the really striking thing about free market economics in the wake of WWII was just how downtrodden its leading proponents found it to be. And so if you take somebody who at the time was seen as a really central figure in free market advocacy, Friedrich Hayek, author of The Road to Serfdom, which came out in 1944, he really emphasized that very few people believed in free market ideals. Even among academic economists. Today we tend to think of economists as people who are broadly oriented toward the market mechanism. But at the time even they, Hayek thought, were deeply skeptical of the capacities of the market to solve social problems. Russ: And, in 1944 he publishes The Road to Serfdom. And what was its impact in the short run? What kind of reaction did it get? Guest: Yeah, so Hayek himself--I think it's important to understand just a little bit of background. He grew up in a fairly aristocratic Viennese family. He was a fairly abstruse academic intellectual, so when he gave his initial talks at the London School of Economics (LSE) in the early 1930s lots of people in the audience complained that they simply couldn't understand what he was saying. So, he was a very unlikely public intellectual. And that fed into his writing of The Road to Serfdom. He didn't think it was going to be a broadly popular book. He wrote it, he thought for a few hundred people maybe in England who would go out and buy it. And then it came out, and it started to sell very well in England. To his surprise. And then the copy came out in the United States and he was invited to head over there for a lecture tour. So he got on a boat to head across the Atlantic and when he arrived on the other shore he was stunned to discover that he had become a kind of massive celebrity. Lots of people had encountered his work. And the primary reason for that was the Reader's Digest, which was enormously popular at the time, had condensed it into a 20-page version, much easier to read than the original version. Which is itself fairly easy to read relative to the other things that Hayek had written. And that condensation got into the hands of tens of thousands of people. It was made available in reprints that went to over a million people. So in the United States at the time, that was an enormous readership for an economist. And so Hayek got off the boat and was almost immediately ushered into a lecture with over 2000 people, an overflow lecture in New York City. And he'd never given talks like this before, so he was stunned to be confronted by all the microphones and reporters and everything else, and had to reconcile what he saw as his fairly abstract and complicated ideas with this massive wave of popular interest in them. Russ: And he got used to it. Guest: Well, he did and he didn't. This is one of the really interesting things, I think, about Hayek. On the one hand, it's very exciting. Anybody in academia, whether they like to admit it or not, loves the idea that lots of people out there want to hear what they have to say. And so he was fairly excited about that; and that shows in some of his writings at the time, and also when he wrote some of his later books that didn't sell as well you can hear little notes of lament over their sales figures. But at the same time he was fairly ambivalent about the way that people were reading the book. The first thing to understand about that, I think, is that most people weren't reading the book. They were reading this 20-page condensation. And it's called a 'condensation'--but I argue that if you actually go through it, it's very hard to see it as such. It's not like they were just cutting out lots of paragraphs. It's almost like you took The Road to Serfdom and put it in a blender and took out random sentences and words and combined them all together into a fairly coherent-seeming 20 pages. So, it really wasn't the book that Hayek had written, at all. Russ: It's sort of like the movie version of some long novels that you read. They get some of the scenes. But they kind of miss-- Guest: Exactly. But it's even more condensed. The movie version at least there's not supposed to be a consonance of form. It's not a written text; it's a visual text; people know that it's in some ways different. Whereas, this condensation, the ambiguity of these Reader's Digest condensation is that they are still nominally by their authors even if they weren't precisely written by them. And so, one result, naturally, when you reduce something down to 20 pages is that it becomes simpler. And Hayek thought his views were very complicated; he thought of them as in some ways ambivalent about--they're sometimes unclear and vague and often very nuanced in how they think that the market should operate, where it should be embraced and where it should be constrained. And lots of people got their hands on this condensed version and got very excited about a version of Hayek that he didn't think exactly represented his own views. Russ: And it got some rather harsh, savage criticism I would say from fellow academics. Some of them hadn't read it probably, but-- Guest: Well, it did, but at the same time it attracted some enthusiasm. When I talk about the nuance of The Road to Serfdom that's sometimes forgotten, one of the really interesting things is just how enthusiastic Keynes was when he wrote Hayek about it. Keynes indicated that agreed with almost everything that Hayek said. That goes to show that--immediately you think of Hayek and Keynes as being opposed in lots of ways, which they were--but that goes to show that this is a little bit different from the version of Hayek that we sometimes receive even in a caricature representation today. Russ: Well, yeah; that enthusiasm was in a letter, if I remember correctly. Guest: That's right. Russ: They were friends; he may have just been encouraging. I assume he certainly agreed with the idea that he didn't want to see England turned into a totalitarian state. Right? Guest: Well, yeah; well, so, this is actually a crucial problem for me. I'm a historian, and I've spent a lot of time going through people's letters. And you always have to ask yourself: to what degree, how do you value what people say in a private letter versus what they say in the published record? And you have to think about them a little bit differently. But I'm inclined to think that it's actually important. You read lots of nasty letters, lots of criticisms in letters. People don't always just say what somebody else wants to hear. There's usually at least a kernel of meaning behind it. And so part of what Keynes was doing was encouraging a friend; they shared a lot of interests during the war. But at the same time he I think was acknowledging that Hayek was accepting large possibilities for certain kinds of social provision and so on, that sort of reduced understanding of Hayek's views at the time doesn't always allow for. |
| 7:58 | Russ: So it was an important moment in this post-Depression, post-war era; this book comes out, it gets a lot of attention. And a group of people at that point, including Hayek, decide that they need to do something in concert, at least get together. And the Mont Pelerin Society is born. And you spend a lot of time on the Mont Pelerin Society. It's something that I knew a little bit about, and now I know a lot more about thanks to your book. And it's utterly fascinating because anybody who cares about political movements, rhetoric, the marketing of ideas, all those issues come together in the Mont Pelerin Society and its aftermath. So start with its beginnings. How did it start? Guest: Absolutely. Hayek found himself, as we've discussed a little bit, in this position where he suddenly had this newfound fame extended beyond the economics profession alone. And at the same time he looked at the world situation and saw what he saw as a kind of inexorable march toward totalitarianism. So on the one hand, in the wake of WWII the memory of fascism is deeply ingrained. On the other hand, you have what seems like a fairly aggressive Soviet communism that has the potential to expand ever outwards across the world. And then if you look at home, if you look at England or the United States, you see the rise of much more substantial state apparatuses than had been the case 20 or 30 years before. So Hayek was looking at these broader trends and considering them in light of his newfound fame and trying to think: What can I do to leverage my fame in order to try to alter the course of events? And this is I think something that's really interesting about Hayek. A normal person confronted with that person would be inclined to go outwards and speak to broad audiences, give lots of public lectures. Hayek had done a little of that on the Road to Serfdom lecture tour. But he didn't think that was actually the effective way to bring about political change. His position was that if you want to bring about long term ideological change, the way to do it is to get together a group of highly selected, largely intellectuals, some business and political elites, and get them to talk to each other about their views and try to re-ground them, try to think through what the central problems were, and develop a way to understand them and a way to represent them to the public that would be compelling in the longer term; and that if you were successful at generating a sense of cohesion within that group and in founding a genuine intellectual project, over time that would filter down to other intellectuals, and from them to college students, and then from them to positions of power 20 or 30 years later. So he saw this as a very long-term project. So, the Mont Pelerin Society is what he created in order to try to achieve that goal. He started it in 1947. It was a group of just under 40 intellectuals, politicians, business people, and so on, that all gathered together at the base of Mont Pelerin in the Swiss Alps for a week to discuss the state of free market thought and the broader political state of the world, and to try to figure out what they could do to improve it. Russ: Really, in a way, he was trying to capture what a great economics department or a great university is about. But there wasn't a place that was that friendly at the time, or a place where a lot of people could get together, and as you point out in the book, he wasn't particularly interested in it only being economists; he really wanted it to be a really wide range of thinkers, because that was the way he thought about the world. Guest: Yeah, no. And this is so crucial to understand about Hayek and I think about this whole era of market-oriented thought. There's a tendency when we talk about the history of economic thought to look at it as an internal problem, a kind of doctrinal problem in the history of economics itself. But part of what I am trying to do in this book is to say that economics is deeply engaged with questions of moral philosophy, political practice, and so on down the line. That it's a thick social problem that needs to be considered as such. And that's very much what Hayek himself thought; and he thought that if you want to think about economics as a philosophical problem in addition to a technical set of problems, you need to bring together economists and philosophers and people who do political theory and get them all discussing with one another. So this was--you know today lots of people talk about interdisciplinarity. At the time that wasn't really the term that they used. But this was very much an attempt to create an interdisciplinary endeavor, to say: What can we as economists take from philosophers and what can we tell them? And is there in establishing dialogue across people who share a certain loose set of views, can we figure out new ways to frame our beliefs that would be compelling to a broader public? |
| 13:07 | Russ: So, who were some of the key people at that first meeting? Guest: You can look at it in terms of institutions, is one way to look at it. So, there's a large contingent from the U. of Chicago Economics Department, which was incredibly important in the world of American economics at the time. So, some of them were Frank Knight, who had grown up as a farm boy and still had a little bit of that rough-hewn quality, but at the same time was an incredibly important kind of philosophical theorist of economics. He wrote a great book called Risk, Uncertainty, and Profit that was based on his dissertation and had made his reputation from that. And his colleague, Jacob Viner, who worked on international trade and had done actually a little bit of work in the Roosevelt Administration. And Henry Simons, a third colleague of theirs who also was very important in that world. And then you had the Institute for International Studies in Geneva, which had been home for quite a while to Ludwig von Mises, the Viennese economist who had been a kind of mentor to Hayek early in his career, and also to Wilhelm Roepke, displaced German sociologist and economist who was a major player in these early years. And finally you had a contingent from the LSE, the London School of Economics. That's where Hayek was for the 1930s and most of the 1940s, and his colleague Lionel Robbins, also a very important LSE professor at the time. So they were the major players, but then there was a broad penumbra of people from a number--it was mostly, all across the Atlantic world, so mostly European countries, they really dominated the numbers in the early years. And also they brought in some journalists, so for the course of the Society's early meetings you had John Davenport, a journalist at Fortune Magazine, for instance. And there were some funding institutions. The Volker Fund helped--this little charitable foundation that helped to finance the travel for the Americans to the first meeting--and the Foundation for Economic Education (FEE), which was designed to bring economics to the masses, were represented there as well. Russ: You left off two Chicago economists who were younger than Knight, Viner, and Simons. Guest: Yeah, right. Well, so, students of Knight--Milton Friedman and George Stigler, very important. So the reason I left them off that list is they still were very young at the time. We think of them as these enormous names in the present day. Friedman certainly was a frequent contributor to the initial meeting. But at the time he had much lower stature than somebody like Frank Knight, who almost nobody outside of the academic world talks about today. Russ: Right. Which is interesting. But obviously Knight, Viner, and Simons were giants. And you talk--you bring them back to life a little bit, which is a very nice thing. And we have a lot of their work here at the Library of Economics and Liberty. We'll put some links up to their bios and work. Guest: I mention Simons in the context of the U. of Chicago Economics Department at the time, but he died in 1947, so he wasn't able to actually attend the first Mont Pelerin meeting, even though they were very clear that he was part of the inspiration for it. And so he lived on in memory but wasn't actually a participant there. Russ: And as you point out, he was an early spokesperson for free market ideas that were struggling to get any kind of foothold at that point. Guest: That's right. Just to say something about Simons in that regard that I think is really interesting, is, so Simons was seen in the 1930s as a kind of free market radical, this Chicago economist who wrote what other economists really thought diatribes in favor of the free market, not as really scholarly writings but much more oriented toward a popular audience. But when you actually read them today, they don't read like diatribes in favor of the free market really at all. So, Simons had lots of ideas that almost seem like sort of crackpot ideas from the far left. Like for instance the notion that you should break up all large corporations and have America be a nation of small businesses, because those large corporations distorted the process of free competition, for instance. And he was in favor of steeply progressive income taxation. And things like that. So you get this wonderful experience of these later Chicago economists, people like Friedman, or, there's a great quote from Ronald Coase looking back at Simons's early writings and saying: Why did we think this guy was a free market advocate? His views look so different to us today. And I think that speaks to some of the transformation in the way that people think about economic problems from the 1930s to the present. Russ: That's true of The Road to Serfdom. The Road to Serfdom has a social safety net--support for a social safety net--health insurance. And I think people who read it then thought it was the most radical, right-wing propaganda. Now it seems kind of tame. Guest: Yeah. That's exactly right. Hayek has some passages where he talks about that's an important function for the state to have potentially, to relieve the misery of the poor, to aid the sick, to prevent factories from spewing poisons out into the environment, and so on. So he seems to have a fairly robust concept of the social safety net and the regulatory state, and what he's really concerned with is the government actually taking over--some things like the National Recovery Administration (NRA) where the government actually starts to take over price setting mechanisms of businesses themselves and to engage in large-scale planning of that kind. And so yeah, Hayek reads much less extreme today than I think people sometimes make him out as being, when you look back at The Road to Serfdom. But it does tell us something that at the time this was seen as really radical rightwing propaganda. |
| 19:04 | Russ: So, talk about the early years of the Mont Pelerin Society. There were some interesting tensions. Many of which were never resolved. It's a strange club. I've been to one of their meetings, and if I can, I have a photograph of myself being upbraided by Milton Friedman himself for a mistake that he thought I'd made--which I probably did make--in raising a question at one of the sessions. He was telling me why I was wrong. Which of course was something he liked to do. In the picture he's talking and I'm nodding. If I can I'll get a picture of that up at Cafe Hayek, my blog. But in the early years, Friedman, as you say, was young. He's going to become a much more important figure by the early 1960s. But in the late 1940s and 1950s, the Society was grappling with some issues that seem rather strange to us today. But they were very front and center then. What were they? Guest: Oh, yeah. The major issues that the Society was thinking about in the 1940s and 1950s. The big concern in a way that animated the gathering in the first place was a notion that Hayek had, what he called 19th century liberalism or Manchester liberalism--in reference to the old British Manchester school from the 19th century--had advocated a certain vision of the free market that didn't make room for social ideals. So, what he saw as--the central one really for him was religion: What's the relationship between the free market and religion? And do free marketeers become aligned in the public imagination with a certain kind of agnostic or atheistic attitude that doesn't pay attention to social traditions and religious beliefs. And so Hayek wanted this group, a central mission of this group for him, was to try to figure out how to come up with a way of framing the free market that would be friendly to those who held religious beliefs and those who were deeply concerned about the maintenance of social traditions. I think this very much resonates as a concern today, because I think we are all aware that the market is this enormous source for social disruption, right? When the Schumpeterian process of creative destruction is a central aspect of how the market works. And so in a period, in the wake of the 1930s, in the wake of the 1940s, you have the Depression and war on everybody's mind, the deep concern is: how do we have a social order that can remain stable? That won't lead to political disruption or enormous financial dislocations? So one of the central reasons, Hayek thought, that the free market was discredited in people's imaginations, was that they saw it as responsible for these kinds of disruptions. That the dislocations of the market led to the Great Depression and led to the rise of Fascism, and so on. And so he wanted to find a way to frame the market that would seem friendly to traditions, to stability, to religious belief. And therefore make it once again compelling to an everyday person. Russ: He was not a religious man himself. But he had respect for religion--you can read that in The Fatal Conceit and elsewhere. And certainly as a marketing issue he felt it was important. Guest: Yeah; this does not necessarily align with one's own personal religion. Frank Knight is one of the fascinating cases in that regard, because he was notoriously anti-religious in some ways. Every time, supposedly, he saw somebody in the back of the lecture hall with a clerical collar on he would give up the lecture he was giving and just start ranting about all of the problems of the Catholic Church. And so he had in some ways deeply anti-religious views. He just loathed what he saw as the dogmatism that he associated with religion. At the same time, at these early meetings he was one of the most vocal people about saying they needed to figure out ways to open themselves up to religious belief, that the free market itself had become this sort of abstract, dry logic, this economistic logic that's wholly separate from the search for meaning that animates religious belief--that it wouldn't be compelling to anybody. And that there may well be a reason for that; that the market itself shouldn't only be seen in these abstract terms; that it needs to be connected to broader questions of meaning and morality. Russ: Yeah. And in our time we have these issues with the alleged effect--I think it's sometimes exaggerated for political reasons--of Wal-Mart and the super-large big box stores on Main Street and traditional American towns; we've got the outsourcing issue. The whole issue of values and meaning I think remains the central question for those of us who favor liberty. And I think about that issue a great deal. I think about how it can be that people can list Ayn Rand as the second-most influential--her book, Atlas Shrugged--book they've read, in surveys, allegedly; so people say. And yet her ideas have so little impact, apparently, on people. It's a small group, of course, that hold her views. But her book is a particularly anti-religious, amoral, self-centered viewpoint. It's a fascinating book; it had a big impact on me. But most of the people I know who read it find it repugnant in many ways. Just for that reason. Not for the economics, but because it's self-centered. Or selfish, depending on how you want to phrase it. Most people are interested in helping people other than themselves, and don't see anything wrong with it. In fact, they think it's a good thing. Guest: Right. And to me this is really a crucial problem. And it's one people writing about the history of economics don't devote sufficient attention to: What is the embedded moral theory that these people adhered to? And how did the moral assumptions of economists change over time? So for me there's a really instructive three-part comparison that you can look at to think about some of these changes. So, if you look first at how Knight thought about these problems, Frank Knight, the great early Chicago economist, Knight had a really interesting view about the relationship between markets and morals. He was on the one hand a market advocate; he thought that capitalism delivered great benefits to societies and should be preserved. But at the same time he thought that it inspired behaviors that are repugnant. And so you just talked about a lot of them--this kind of self-interest, greed, stuff that makes its way onto the front page of business sections on a regular basis. Knight worried that market society creates precisely the behaviors that lead to its undermining. That it generates a certain kind of greed that eventually makes it unsustainable. And so the central problem of market societies as he saw it was to try to create a framework that would restrain those excesses sufficiently in order to allow markets to continue to operate successfully. Now, if you contrast that with Hayek, in my reading of Hayek, at least, there are some powerful sections on these issues in The Constitution of Liberty. Hayek says that we shouldn't favor--that markets don't necessarily lead to beneficial behaviors or destructive behaviors. Rather, the reason that we should favor market society over socialism or communism is that, as he saw it, it's a morally neutral arbiter; markets yield outcomes that don't claim to have any moral significance. And as soon as you have a moral arbiter, you have somebody enforcing their moral view of the world on everyone else; and that creates all kinds of problems and restrictions. So to him the very virtue of the market is with the fact that they were detached from these kinds of moral issues. And then finally, if you look at Friedman and talk about the ethos of self-interest, Friedman thought that there was basically complete overlap between market outcomes and people's contributions to society. So, if one is virtuous, the market will reward it. If one is doing something that benefits other people, you'll be paid commensurately. So for him it's almost exactly the opposite of somebody like Frank Knight, and the market doesn't generate behaviors that are cause for concern, but rather it generates precisely the behaviors that you want to see. |
| 27:42 | Russ: And I think Adam Smith also felt that the market was a civilizing force. That it encouraged and rewarded virtue. We know of course there are exceptions. The question is: What's the alternative? I like the old joke--I don't know where it's from; somebody said it's from Mad Magazine--that under capitalism, man oppresses man; under socialism, it's the other way around. Bureaucrats are greedy, too. Politicians are self-interested. The question is: What's the best way to harness people's best aspirations while restraining their worst? And I think what's missing from most discussions today of the market and so-called free market economics is people forget about what's often called 'civil society'--the ability of people to spontaneously, voluntarily create organizations that help other people. And to me that's part of the market vision of Hayek, and it often gets forgotten. As if somehow the market is only about buying and selling. It's not just about buying and selling. Guest: And you know, one of the fascinating areas if you look at Friedman talking about these kinds of issues is that Friedman claimed--so, if you were to take, and I'm not going to evaluate the rightness or wrongness of these different perspectives--but if you were to take a leftist perspective on the market and sort of democratic thought, the concern that a lot of leftists have is that large corporations or wealthy individuals effectively use their money to buy the opinions of large bodies of people through all kinds of propagandistic means. Friedman has an interesting contrary perspective. Friedman's view on that was that wealthy people enabled the incubation of dissent. That is to say that if you have a wealthy person who has some crackpot view that nobody else agrees with, but if you have a free society, they can go off and fund a little institute that supports that view. And that can help to foster greater diversity of perspectives than is possible in a society that doesn't actually have sufficient amalgamations of wealth to make that kind of institution-building possible. There are benefits and hazards in terms of public opinion in terms of large aggregations of wealth, but Friedman was adamant about drawing attention to the benefits. Russ: The same role that venture capital plays in destroying large businesses that are comfortable and not innovative. Startups can challenge them ultimately through--if there are enough wealthy people to fund their competitors. The same could be true of the intellectual marketplace. That's his argument, right? Guest: Yeah, that's right. That's really well put. And I think the fascinating thing about looking at some of these early members of the Mont Pelerin Society is that they really saw their project in precisely those terms. So if you look at an organization like the Volker Fund, that helped fund the Americans' travel to attend the first meeting, the people involved in that wanted to support free market views; and their idea was that you put what are relatively small amounts of money into getting these kinds of people together. Much like a venture capitalist with a little bit of money into a variety of little startups; and then you just sort of wait. And some of those bets will work out. Some of the people who attend that meeting will go on to do really interesting things maybe as a result of having attended it. And other people will turn out to be duds. You can't really know at the outset and so you spread your bets. And then you have to be patient; you have to wait and see what happens. |
| 31:19 | Russ: So in the late 1950s another voice against communism, at least, comes forward, and that's William F. Buckley of the National Review. And I was fascinated--I didn't know any of Hayek's views about that, but Hayek was not comfortable with the National Review and Buckley, Russell Kirk, and other Conservatives. And both he and Friedman resisted and resented being called 'conservative.' Why was that? Not the same reasons, of course. But why did they resent that and why were they not comfortable with the rise of conservatism in America at the time? Guest: Actually, I think I'll answer that question in two parts. Because there was a little bit of a change in Hayek's perspective. Hayek was initially quite enthusiastic about Russell Kirk. When Russell Kirk came out with his giant book, The Conservative Mind, Hayek was fairly enthusiastic about a lot of it. He had some quibbles, but he thought that he largely shared Kirk's point of view. Fast forward a few years later and you have Hayek getting up before the Mont Pelerin Society to give his talk on "Why I Am Not a Conservative." Which you can largely read as a criticism--you can read it as a criticism of several people, but it's largely oriented against Kirk's views. So Hayek had taken a turn. I argue that you can begin to see there the rigidification of certain kinds of different perspectives in the American conservative intellectual world. People who saw themselves in the late 1940s and early 1950s largely as sharing the same kind of project, by the time you get to the late 1950s and early 1960s begin to see themselves as more oriented toward something we'd see now as libertarianism. Or more oriented toward a certain kind of traditionalism; and see their views as not being as aligned as they once thought they were. And so you see Hayek giving this lecture on "Why I Am Not a Conservative." And Hayek's concern about conservatism is that conservatism embraces the status quo. And Hayek thought the market is a progressive phenomenon. The market creates change. Somebody like Kirk--Kirk was famous for refusing to drive an automobile and wearing a cape around and living in northern Michigan in a sort of ancient house, so he very much seemed--he loved St. Andrews and old gothic buildings--he was envisioning himself as in some ways as somebody aligned with a certain kind of medieval idea, let alone with an early modern or more market society ideal. So Hayek says that being an advocate of the free market is something really different from that. That it is not an embrace of the status quo or a nostalgic valorization[?] of an old way of being. Instead it's, he thought, a certain kind of progressivism--progressivism engendered by the forces of the market itself. And Friedman very much hewed to those views. But the one thing I'd add to that is it's just fascinating to look in the 1950s at how much trouble these people had with all these different kinds of terms. Whether it's libertarian or conservative or neo-liberal or classical liberal, or Hayek used the term at one point 'Old Whig,' they had all these different words that they could conceivably use to describe themselves, but they really couldn't, the early members of the Mont Pelerin Society couldn't figure out what they actually were. They all disagreed about what they should name themselves. Russ: I think actually--it sounds kind of silly to worry about--but I think it's actually quite important. I am often called a conservative economist, and I hate that. And I always say: I'm not a conservative; I'm a classical liberal. 'Classical liberal' is a nice phrase; nobody knows what it means. You can then describe it; you can say: limited government and personal responsibility. It's not a bad forward description. But 'Old Whig' is definitely not a good term to market yourself as. And I think without a term, without a banner to rally under, it hampered them. And I think it hampers the movement today. Guest: Yeah, that's absolutely right. And I talk about this rigidification of differences over the 1950s and early 1960s. One of the reasons--it's both a reason and a symptom--that they couldn't actually figure out what it was that they all precisely agreed upon; they all felt that they shared certain kinds of loose affiliations but how they defined it really differed. And so each of these different kinds of terms signified a different orientation, subtly. At the time--and this is really different from the way the term is used today--but at the time to call yourself a 'neo-liberal' was to emphasize the ways in which your views were different from, say, 19th century Manchester liberalism. So, we've talked about some of the ways--the embrace of social insurance and so on down the line, all the ways in which you saw our government intervention potentially working to the benefit of society. That was what at the time made you 'neo-liberal.' If you called yourself 'libertarian' it had this slight anarchist undertone that worried even somebody like Friedman, who really in almost every case thought that the market was the way to go, worried that it made you sound libertine in a way that was aligned with a certain kind of fringe sensibility. So he thought that that was a marketing problem. And, as you say, a 'conservative' signifies an orientation toward the status quo, that it doesn't really conform with a lot of their views. And so you have a lot of these terms, but none of them seem quite right. Russ: My former colleague and occasional guest here, Dan Klein, likes the term 'Smith-Hayek.' It's not a good marketing term but it's very accurate, the way a lot of people-- Guest: That kind of has resonance with--Hayek wanted to call the Mont Pelerin Society the 'Acton-Tocqueville Society.' That caused all kinds of disputes over the fact that they were both European Catholics was concerning people who were thinking about marketing these ideas in the United States, for instance. I think the fact that you can't find a single term and try to associate yourself with these complex views of different individuals is telling in its own right. Russ: There's a lot of entertainment in your book as people resign, threaten to resign, don't want to go along with--it's a very academic game that we all play: If I'm going to join a club it's got to be just like me; and no club is really just like me except my club; and so it's a lonely club. And if you want to join with others you've got to compromise a little bit. Most academics aren't so good at that. That was interesting. Guest: That's right; and I think that aligns, too, with the fact that academics often are the most violent in describing their disagreements with the people who are relatively close to them. You look at the Mont Pelerin Society meetings and I think there could be a certain kind of--people who don't really look that closely into them can assume that everybody largely agreed on a lot of things, but then you actually dig into the transcript: It's almost all disagreement, these people all expressing deep enmity over relatively minor distinctions. Russ: Some of that's marketing, too, right? You are trying to create your own product. It's a complicated thing. |
| 38:46 | Russ: Let's move on to Milton Friedman, which is a big chunk of the last half of the book. You have a lot of interesting things to say about Friedman. One of the things that I was most fascinated by was your discussion of his methodology work, which I don't usually think of as being so important. It was important in certain--to my mind, justifying the Chicago School of economics, which when I think of it was applied price theory. Meaning certain basic assumptions about individuals maximizing their own self-interest, broadly defined--it can include charity, it can include altruism. It's a fairly neutral idea that the world then has empirical realities that are either consistent with those views or not. And that to me is sort of what his paper is about--his paper on methodology. But you have a different take on it. You argue that his methodological view helped advance his ideological position. Explain what you mean. Guest: Absolutely. I think it helped it in two ways. Russ: You should say what it is first. Guest: Yeah, well, I'll step back and say the first thing to understand about Friedman's methodology, the way that he represents it, is at least a little bit unique in the time. One reason is he was educated in two different places. Lots of people think of Friedman as a Chicago economist, but he spent a year at Chicago and then went and spent a year at Columbia. In Chicago it was much more oriented--it wasn't an a priori view of how you think about economics, it wasn't a notion that you just generate pure abstractions out of thin air; but at the same time it was much more theoretically inclined. It was: you start with theory and you work from there. And then he went to Columbia, which was really oriented toward empirical data collection. So, Wesley Mitchell, great institutional economist at the time, emphasized that the main duty of the economist was to assemble empirical data. And then you try to induce from that what the theory should be. So Friedman had this dual education in two very different ways of thinking about economics, and he brought them together in a sense in "The Methodology of Positive Economics." And so what he said is the economist starts with a theory, a kind of hypothesis; and then you take that hypothesis out into the world and you test it against the empirical data that you can gather that's relevant to it. And that might prove or disprove it; and you try to refine the hypothesis. And that's the way that he thought that economists should generally proceed. Now, I think this is important for a couple of reasons. One is, I see it as a kind of embedded rehabilitation of the idea of the homo-economicus--the economic person, the rational calculator. And so this was an idea, if you read the economists of the 1930s, that was deeply maligned. If anybody advocated for the free market on the basis of the idea that the individual is a kind of rational utility-maximizer, they were criticized because of some things we've already discussed in the past half hour--that it seems to contradict all kinds of behaviors in people's everyday lives; people are very conscious of the way that they and their family and friends seem altruistic, so this idea of a rational calculator seems intuitively wrong. But what Friedman said is what makes a hypothesis useful and powerful isn't whether it accords with our intuitions, but whether or not it's accurate in a predictive sense when looking at broad masses of empirical data. So his methodology I would say is an attempt to say that we don't evaluate a hypothesis of this kind on the basis of whether or not it seems right to us. We evaluate it based purely on its predictive capacities. And there he thought it was very robust. And so that's one way in which it was important. And the second was, in this emphasis on empirical data collection, if you compare an Austrian view of economics, which derives basic principles from abstract theorizing--and in the case of a purist, somebody like Mises, there's basically no empirical dimension here; you are creating elaborate theories based on your own thought alone--and you compare it to Friedman's perspective, which is very much outward-reaching, they are very different forms of argumentation. I think this gets to exactly what you were saying about Ayn Rand--why has Ayn Rand, read by so many people, intensely influential among subsets of them, but at the same time the broader influence in the social environment is more limited. And, Friedman's argument about that--he made it explicitly about Mises and about Rand--is that if you argue that you have an abstract logic that's universally true, that you can derive wholly from thoughts within your head, if other people don't believe that they share that logic, you are going to have an enormously difficult time convincing them that you are right. And Friedman said, in contrast, what I can do, my method, is I can say: Okay, we both share the same end; we share the end of the well-being of the poor; but I think that if you examine the data, I can show you that my way of organizing society will be more successful at achieving that than your way. And whether or not one buys into how Friedman read the data, Friedman was adamant that that mode of argumentation was much more likely to get somebody to rethink the views that they already hold than a mode that proceeds based on an abstract logic alone. |
| 44:20 | Russ: And on the surface, it appears to be more scientific. And I have to say, as someone who was educated at Chicago and influenced deeply by Austrian thinking after graduate school, I'm sort of in between. I see the argument that you don't want to spend all your time trying to convert people--I think is the phrase you used in the book that Friedman didn't want to have to convert people using just logic. He said, if it's all logic then you have to convert them through logic or force them, and he didn't want to force them. Then you've got to out-argue them. And of course he was really good at arguing. But most people don't argue to learn the truth. They argue because it's fun. So, most people who you argue with aren't going to go: Wow, I never thought of that. Now, you might dent them eventually, but the empirical approach has obviously got some superior virtues. The problem I have now, 30-something years out of graduate school, is: I used to have a romance about empirical evidence that I think Friedman had--that the truth will out, that eventually the best empirical work will convince people. And I think that's true of certain kinds of empirical work. His is the best kind. I think the Monetary History of the United States is probably the single most influential piece of empirical work in economics. But it's not complicated empirical work. It's not multivariate regression. And I've come to believe--we did a podcast with Jim Manzi on this and it's certainly the essence of Hayek's Pretense of Knowledge Nobel Prize Address--that in complex systems, we can't measure things the way it seems like you can; and what then tends to be overwhelming is bias and you're back really just pretending you are scientific. What Hayek called 'scientism.' So, I think if we are really honest, we are ultimately going to be arguing about logic, but we are going to be using these empirical studies often as support that maybe is not so legitimate. Guest: Oh, absolutely. That's absolutely right. There's a deep tension in the history of economics. There's often an attempt to represent ideas as more scientifically-based, more empirically-founded than often is the case. Russ: Obviously a problem on both sides of the spectrum. Guest: Right. Russ: I'm not picking on one side. Guest: Oh, absolutely. That's an interesting thing about looking at the contrast between this generation of talking about the 1930s and the generation of which Friedman was a central figure: is that you look in the 1930s, you look at people like Knight, and Hayek at the time, and a number of their colleagues; and they looked at Keynes. And they thought, you know this guy has an enormous amount of public credibility and he leverages his scientific reputation, the fact that he has these fantastic scientific credentials, to head out and to claim that there's scientific merit behind propositions that they say as really based on his own personal views, and not as being a product of scientific consensus at all. And their response to that was to say: okay, we shouldn't embrace this kind of public role. That what Keynes is doing is in some ways antithetical to what the academic should be doing. Raising this kind of public role is a false kind of representation of something that's not science as being such. And there's a real generational transfer when you get to Friedman and you see how vociferously Friedman embraced his public role. And in a sense he modeled himself in that way after Keynes. And Friedman and Keynes are in some ways the two great poles of 20th century public economics. And so it cuts both ways, this representation of ideas as being scientifically based that aren't necessarily so can happen on the right and on the left. And the one uniform thing is that it bothers colleagues on the other side of the aisle who watch it occurring. You know, one other interesting thing I'll say if you talk about this sort of marketplace of ideas and that's something that Friedman really believed in. Friedman thought much as you have goods competing in the marketplace and the best good will win out, you have ideas competing in a marketplace of ideas and the best idea will win out over time. He had a real faith in the capacity of better ideas to win when you have clashes in public debate. And that undergirded a lot of the way in which he participated in public debate. And as an historian I appreciated that because it also, it was the way he thought about his own papers--he was very open about his own papers because he thought that scholars reading them, the ones who were reading them in the right way, would win out over time. Russ: Yeah, it's interesting. I interviewed him for EconTalk in 2006, shortly before he died. Guest: Yeah, yeah, I drew on that interview a little bit. It was helpful. Russ: And he says in there--and it may be false modesty, again, this is one of those issues again for an historian it's hard to know--but he says that he didn't feel that his Monetary History of the United States, co-written with Anna Schwartz, was decisive in bringing the world to the view--which certainly became the view--that monetary policy is the key to stopping inflation. As opposed to all the other theories which were prevalent in the 1960s, which were cost-push and cost-pull and unions and oil prices. Friedman say: No, it's the money supply. And I think he basically won that intellectual debate. But when I asked him about that he said: No, no, no, it wasn't my study; it was events in the world that caused people to see--in New Zealand, for example, they'd stopped printing money, and inflation went down. What he would admit to--and I think you talked about this as well--is that you need to have ideas around that allow events to take advantage of them. So, when you see that inflation went down, it's nice that there's a study you can wrap your arms around and hold up and wave and say, Oh, look, here's the proof. But that's the direction of causation. Guest: Yeah. That's absolutely right. And that's a crucial thing to understand--that Friedman thought a lot about this. Both Friedman and Hayek thought a lot about the relationship between ideas and political change. And Friedman's theory was very much the one you laid out right there--that his role as he saw it was to lay out a kind of intellectual infrastructure, to put a whole set of policy ideas out there on the table, and then they would sort of lie in wait. So this is what he did in his Newsweek columns, started in 1966, read by over 10 million people. Very influential column. And he threw out all kinds of stuff, whether it's cutting funding for the Corporation for Public Broadcasting, eliminating government aid for natural disasters, the flat tax, school vouchers, negative income tax, and so on. All these ideas. Russ: Volunteer army. Guest: Yeah, volunteer army. So he threw all this stuff out there. And most of it at the time looked absolutely crazy to people. It seemed like totally infeasible ideas. And then as he saw it, you just waited for these different--whether it's the public education system or whether it's monetary policy--you wait for a crisis to arise where people are suddenly sensing that the existing system isn't working and they are casting about for other ideas. And then, having this set of alternatives lying there ready to hand would make them suddenly seem viable in a way that they weren't before. And so this isn't a story of ideas bringing about prophecies of political change. Instead it's a story about people generating ideas and then waiting for political events to reach a point where they seem viable when they didn't before. |
| 52:21 | Russ: Now, you describe Friedman as a utopian. Which he clearly was. And as you point out, those ideas you just listed, most of which he laid out in Capitalism and Freedom in 1962, were so far out of the mainstream. And many of them, of course, were adopted. Although in 2006 when I interviewed him he emphasized that many of them weren't. He was very much at the end of his life--and I think you mention this as well in the book--he was a half-empty rather than a half-full kind of guy, particularly with respect to the size of government. So one of, I think, the ironies of this whole conversation is that while the idea of the free market has been resurrected since the Great Depression, it's not zero but it's not anything close to what its proponents certainly argued for. But I want to make a different point, which is you describe him as a utopian, who at the same time was willing to get into the policy arena and put forward ideas that were steps toward utopia. Rather than pretending that one day overnight people would just say, let's let government get much smaller, he wanted to take steps toward it. So, two examples that you mention that I think are important are school vouchers and the negative income tax. The negative income tax was the inspiration for the earned income tax credit. Which has become a very important idea. And it just strikes me, as a student of Milton's and as somebody who agrees with an overwhelmingly large amount of what he had to say, that those, you could call them compromises, he sort of held his nose. He sort of said: These are things we could do in the meanwhile, till we get to the better solution. But they have a tendency to get entrenched. A lot of people, myself included--I don't want to see school vouchers and I don't want to see the earned income tax credit because the recipients, once they get the money, are going to use the political process to enlarge the scope of those programs, and I think do some bad things. Which I think is what has happened. What's your reaction to that? Guest: Yeah. Well, so, I think that this is important for a variety of reasons. First of all I think it's important for understanding Milton Friedman. I argue in the book that with limited exceptions of which monetary policy is an obvious one, Friedman almost always believed that the market was the best way to order any kind of social decision-making process, rather than relying on politics. And so, these examples--vouchers and the negative income tax--are usually the first things that are brought up as counterexamples. These are potentially--the negative income tax seems to embrace the social welfare state. School vouchers seem to embrace public education. But you are exactly right. When you'd catch Friedman talking to libertarian organizations he was very quick to say: These aren't part of my ideal society; my ideal society wouldn't have public education; my ideal society would not have income redistribution; but the reality is that we live in a world where abolishing these systems is highly unlikely. I think to him it's highly unlikely that we'd reach a state of crisis that would lead people to take them seriously as possibilities. So in the absence of that he thought that the best way to bring about social change was to advocate for these kinds of policies, that would help to bring more of a market sensibility into what the government administered. And this was powerful for a couple of reasons. One, is that it made Friedman seem like a more practical thinker than the utopian thinker. I mean, utopians can be powerful in changing how people think about the world, but when it comes to practical policy implications, it's very hard for a Congressperson to say, Okay, here's how I put this into effect. So this enabled Friedman to put together a range of proposals that did seem feasible, that did seem like things that Congress could enact. And the second thing is it enabled him to speak to different audiences in different ways. So if Friedman was speaking to a kind of centrist audience and he wanted to seem like a reasonable person, he could talk about the ways in which vouchers would save public education. And at the same time, if he was talking to a libertarian audience that had some of the skepticism that you've just expressed, he could say: Well, this isn't what I really believe; I share your ideals but I think this is the best way to bring a system close to your ideals into effect. So, it gave Friedman a great deal of versatility in talking to different kinds of people. |
| 56:44 | Russ: So, let me give you a pessimistic view and get your reaction. I would suggest that to a large extent, at least so far--and of course time passes and things change, people make predictions and people say that's right or wrong, but sometimes predictions come back to bite you and sometimes they come back and are redeemed. Friedman was very critical of the Eurozone, said it wouldn't last. He was onto something. He may not be right, literally, but he certainly understood some of the tensions that they are facing right now. But my question would be this: Certainly Friedman and Hayek have--and their peers--have had a tremendous impact on intellectual life in the last half of the 2th century and up to the present. But their impact on policy has been very limited. We haven't moved to social planning; we haven't moved to central planning; we haven't moved towards communism or socialism. We deregulated the Federal Trade Commission (FTC) and the airlines. But in terms of just the overall hand of government--you know, right now we're fighting about whether you can have sugar in the drinks in New York City. It's rather striking to me how half-empty in some sense the glass is. What do you think of the argument that says the main impact of Friedman and Hayek has been on the intellectual environment rather than on the policy space? Guest: As you pointed out that's certainly an argument that Friedman himself shared, and as he put it: We've had an enormous effect on the ideas but not on the practices of our time. I think it's a very thick problem. When you look at the list of all the different proposals that Friedman put out there, a fair number of them have--as you say, things like welfare reform, the earned income tax credit--or whether it's discussions, very live discussions about aid following national disasters that didn't seem like live discussions generations ago--there are a whole--the volunteer army one that you mentioned that was immediately successful: there are a whole host of policy proposals that Friedman threw out there that gained a certain degree of traction and had fairly significant effects on politics. I mean, you look at the transformation of the income tax system in the early 1980s. So you can look at a whole host of areas where these ideas have had significant effects. At the same time, the basic structure of the Federal government certainly hasn't been transformed in the way that it impacts people's everyday lives, hasn't been transformed in the way that Friedman would have envisioned and hoped. There's absolutely no question about that. The changes felt to him much more incremental than deeply substantive. So maybe I would have a more robust view of their influence than you just expressed there. I don't think it's a matter of purely--I think the intellectual environment and the political environment are thickly intertwined. Some scholars have done great work on the influence of think tanks, for instance, where you can see how that functions. But at the same time maybe less influence than people who see Friedman as a maligned force would have one belief. Russ: You misspoke, by the way, when you talked about Friedman supporting the abolition of the volunteer army. You meant the draft. But I'm sure most listeners caught that. Guest: I apologize. Russ: No problem. |
| 1:00:17 | Russ: There are two things I want to ask you about and then we'll close. Talk about the differences between Friedman and Hayek's vision of the Good Society. I think in a lot of people's minds they are both the same. They are both free market people. But you have some very nice things to say about their differences. What were they? Guest: Maybe I'll just back up just a second there and say that their different visions of the good society, one way to understand them is to understand their different points of emphasis. Hayek was a thinker who as I see him really emphasized the ignorance of the individual. His whole emphasis on spontaneous orders and so on, they are an advocacy of the market based on the notion that the individual person has a highly limited view of their social world, and so the market itself becomes the kind of ordering structure that organizes ignorance in a much more efficient way than one individual trying to impose, as he saw it, their partial vision on the whole host of people. So Hayek was a theorist who emphasized ignorance. And Friedman at the same time was somebody who really emphasized that the market was a kind of perfect processing mechanism, as an embedded form of knowledge. So, whereas Hayek emphasized the ignorance of the individual, Friedman emphasized the knowledge embedded in the market itself. And I think this comes through in their visions of the good society. Hayek was a little bit humbler in his vision of what an ideal society would look like. He was much more open to the idea, as we discussed in The Road to Serfdom and his other writings, that the good society would involve substantial amounts of redistribution, social welfare net, regulatory structures, and so on. Whereas Friedman was much more inclined to believe that the knowledge embedded in marketplace decisions would yield better outcomes than all those different kinds of [?]. So even though Friedman didn't like the label 'libertarianism,' it's something that's very close to libertarianism. Because when you have a choice between a market decision and a political decision you always opt for the former. Russ: I think they came together in that knowledge issue in--I think of "I, Pencil," Leonard Read's pamphlet, which we have up on the web--as the part that they shared. "I, Pencil" is really an application of "The Use of Knowledge in Society," Hayek's classic essay. And Friedman loved that example; and used it of course in the opening of Free to Choose--on the front cover of Free to Choose he's holding a pencil. Deliberately. As an example of the complexity that the market can yield without anyone's individual knowledge. But where they differed it seems to me was on this issue of values. And you talk about that in the book. Guest: Yeah, that's right, and that's a challenge of emphasis. I think there is sometimes a convenient narrative that takes hold, both on the political right and the political left, although for very different reasons, that puts Hayek and Friedman as part of the same intellectual traditions--largely adhering to the same set of views. So part of what I'm trying to do in this book is to say that, well, if you look at the long sweep of the history of market advocacy, you realize that there are a lot of differences between the two. You can see a sort of thick history of contestation and transformation if you look at market ideas from the 1930s to today. The challenge is that can become overemphasis: that in emphasizing all these differences you forget what brought them together. The very existence of the Mont Pelerin Society as a kind of durable institution, that they both were leaders of, over an extended period of time, is a reminder of precisely what you just were saying. That, despite all these differences that I've emphasized in our conversation, they did share many points of view and they were part of a common movement, with one another. Russ: Last question: In the 1930s, Keynes's main protagonist was Hayek. From about 1957 on--and I pick that year because I think that's when Friedman wrote The Theory of the Consumption Function, which was the first brick that he put down in the wall against Keynesianism, which he continued to add to throughout his career--from that period on, Friedman was Keynes's main antagonist. Certainly with respect to public policy, to fight business cycles, to fight depressions. And in general is antagonist for interventionist view. He did a lot to emphasize the rule of law over ad hoc intervention, rules over discretion. And yet, when the Crisis of 2008 came, and in its aftermath, Hayek has been the voice that gets raised the most. It seems to me. And I'm a student of Milton and a fan of Hayek. I've waved a lot of Hayek around in the last 5 years--in my rap videos with John Papola; Glenn Beck held up The Road to Serfdom on his show, which put it Number 1 on Amazon. Do you find that surprising, how little Friedman's voice is heard in current debate? And how much Hayek's is? Guest: I do and I don't. And I guess I'll focus on, since you've emphasized why it's surprising, I'll emphasize why it's not. And then I'll say a word about what I think the implications are. An essential difference between Hayek and Friedman here was that Hayek was in many ways a dark thinker. If you read Hayek in the 1930s and 1940s, the thinks the world is coming apart. Certainly Hayek's response to the Great Depression was not one that imbued with a great deal of optimism. He thought that to a certain extent you just have to wait things out; if you try to intervene to solve the problem you'll only exacerbate it. Whereas Friedman was this tremendous optimist. Friedman was always emphasizing--he said that what Hayek and Robbins got wrong when they were responding to the Great Depression was precisely that: that they said you shouldn't do anything. He thought that part of what he was doing in monetary theory was to try to come up with a way to say that there was a solution, something that could be done that would prevent this kind of problem. A kind of counternarrative to Keynes. And he always emphasized--instead of dwelling on the catastrophic situation that the world was in, he always emphasized the ways in which those catastrophes could be solved by the market. And so when you reach this moment of deep pessimism that I think a lot of people associated with organizations like the Tea Party felt, Hayek in many ways feels more consonant with that set of views. His chiliastic[?] tones align with the perspective that a lot of market advocates have in the present day. In that sense it's not surprising at all that there's kind of a revival of Hayek. At the same time, I would say to them that precisely what made Friedman so influential in the public sphere was that sense of optimism. I make an argument in the book that Friedman was in many ways the rhetorical underpinning of Reaganism, that a lot of Reagan's messages about the benefits of the market were derived from rhetoric that Friedman had developed. And so in emphasizing this dark perspective that can be very powerful among subsets of people who agree with that perspective but in the end can limit the public influence of a group in a broader political environment that in difficult times is looking for optimistic solutions rather than expressions of despair. |
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| 0:33 | Intro. [Recording date: March 6, 2013.] Russ: Your book opens some time in the near future when the relationship between buyer and seller has changed, and when the economy reflects intention, which is the source of your title. And power, or influence, perhaps, is more in the hands of buyers than it is in sellers. Give me a typical day in the life of a consumer in the intention economy when this world may have come to be. Guest: Firstly, I want to make clear that the idea of this is basically to extrapolate out into the future as to what's likely to happen as more tools to express intention fall into the hands of customers. And that businesses build around equipping demand to seek supply and not just for supply to capture and lead demand. Which is where most of the marketing efforts have gone for the last 1500 years. And it's based on actual developments going on now and that I've helped encourage for the last 6 years through Project VRM at Harvard's Berkman Center, where 'VRM' stands for Vendor Relationship Management, which is the customer-side counterpart of Customer Relationship Management, which is something most of us have through junk mail and call centers, things like that. And I see this as not something that is contentious or something where customers are opposed to marketers, but rather something where a new symbiosis begins to develop as more business orients around what customers actually want rather than around what we can guess the customers want. So, looking 5 or 10 years out what we see happening, for example, is that individuals will have instruments for expressing their intention, that will probably appear in the form of apps [applications] that they have and will [?] and knit together, apps mostly on their phones and pads and things like that. I give the example of a middle class woman in the United States who is traveling with her family and it begins with her getting a sleep monitor, which already exists--it's called ZEO and it's one of many tools one can use to do what's called 'quantified self,' for monitoring one's own diet and exercise and health data and stuff like that. In the course of this she experiences the ability to set her own terms. This is something we are working on now, which is, you know how we have these really onerous terms that we click through and never read-- Russ: Yeah, 'I agree.' Guest: Exactly. Russ: You know that part that say 'I agree' in that little box? I read the part that says 'I agree'--and it says actually 'I agree and I've read all this' garbage. And I do sometimes check the box without reading the garbage, I have to confess. Actually, I don't think I've ever read the garbage. Guest: Well that's the thing. I'm trying to remember her name, I spoke to her yesterday at Stanford, and she did a study that we would spend half the time that we spend on the web today would be taken up by reading these things, if we actually bothered to read them, because the volume of prose in them is so high. This is friction in the marketplace and it's also, it's a convenience that we came up with on the seller's side because we could not engage in ceremonies that would be involved if freedom of contract were a practice and not just an ideal. And that's not a hard thing to do. We should be able to assert our own terms most of the terms that we have, would we be able to assert them, would not necessarily be onerous to sellers. It would be like what we have when we are in a public marketplace. I'm not going to steal your stuff; I'm not going to act badly in your store; whatever it might be. We can take these piece by piece, because in that chapter, [?] impact pretty much the whole book in the scenario, but this particular one is in fact the biggest problem that we have, which is that we have these one-sided non-agreements that we make that might make for a much more efficient marketplace if they really were two-sided. And it's not hard to do. All we have to do is have machine-readable code on both sides that express good will and some simple intentions, one of which would be, is likely to cause some, you know, some trouble with people on the sell side, which is: I would like to have my own data back when we are done with this transaction. Or: I would like to have it in a form that I can read. Or: You can't follow me around with cookies and beacons and other things like that, which is now pro forma on the web. |
| 6:50 | Russ: But is the question here just the question of opting in or opting out? So, right now generally I have to opt out if I don't want to be followed around. I have to say: Stop; you can't use cookies; you can't follow me. The default is: you can. So, in the current world I have to be active to get them to stop. Are you just suggesting that it should be active on their part that they get my permission to follow me around? And to do stuff with my data? Guest: Yes, but [?] in a way that's more complicated automatically than we get with a web page right now. There is in fact a dialogue that happens between your browser and a website. Your browser says: Give me a webpage. And the website says: Here, have a webpage. And what's going on also is the website says: Regularly I give you a whole bunch of cookies along with this, but we're not going to tell you about it. And that is done routinely, anyway. Russ: And cookies--define it for non-tech people. Cookies are just markers that say I've been there? Guest: They are actually little files. They are text files, generally. And the text file was originally intended by the guy who designed them--named Montulli, at Netscape back in the middle 1990s--as a way for a site to keep track of what's called 'state,' which is: This is where we were the last time you visited. This is how, of course, when you go to Amazon it remembers what you have in your cart and what you looked at last time. They are a perfectly fine convenience. Russ: Most of the time we like them. We don't have to start from scratch. Guest: We like what they do. But we are really stuck in 1995 in this sense. One of the developers, Phil Windley, who is doing pioneering work I may talk about later, has a really great slide presentation in which he gives the history of e-commerce. He says: 1995, Invention of the cookie; The End. We sort of stopped there. And the thing is that right now, as you said, our only choice is to opt out. Which is to say, not use the site at all or not use the service at all. And that's not really a realistic choice for most of us, if we want to use the web. So, what we are trying to do is just put some of the responsibility for this automated dialog on the customer's side, or on the user's side. And it's not a hard thing to do. That the ritual that we might have, or this ceremony, or protocol--these terms are actually used in computing--is when the users, a browser, says: Here are my terms. Have your machine take a look at my machine's terms. And the other side's machine says: Good; that matches up and we can move forward. Or it doesn't, and if it doesn't then it will flag those things that don't agree, and we can either opt in or opt out or whatever. But the development that's gone on so far is toward the creation of those terms and toward symbols, for example, that show you whether the terms match up or not. And one of the things I talk about in that chapter is something called the R-button, and the R-button is simply two symbols--they are actually logical symbols that look like sideways U's, the letter 'U', that look like magnets facing each other. Which we think represents the way the marketplace works--we have a buyer and a seller who are naturally attracted to each other and if they hook up and transact business or develop a relationship, it would be nice to have a symbolic representation of that. And these are very simple and straightforward and can be represented by either being a color or a solid or gray, but could just simply fall into the portfolio of other familiar symbols that tell you things like 'There's WiFi here' or-- Russ: 'Refresh this page'--there's a little marker. Guest: Exactly. Russ: But these inverted magnets, these magnets that are facing each other, this little symbolic idea that you have--what would be the significance of, say, different colors or being gray versus black? What would they denote that would be useful to this relationship? Guest: Well the first is, and I think this might be the most important, and again this is something we're developing, it's not something that's done; there are developers working on it--but if it's a solid color, and we've called it 'red' or R-button in red only because that was the color of the marker that I used on a whiteboard when we first were talking about this. But let's say it turns green, or just turns a solid color, for the color-blind among us, which are significant. And when it turns solid it means, when you go to a site and you see that little sideways U, this site's R-button, and it's solid, it means that they are open to your terms. It doesn't mean they accept your terms, but they are open to them. If it's solid on both sides, it means: Oh, our terms match up. And if the two sides are joined, it means: Oh, we already have a relationship. So, let's say if we go to Amazon and we have a relationship with Amazon and our terms have proven agreeable, in the first place, then we see the two matched up and joined together so they form two links in a chain or something like that, or two magnets actually joined to each other. It's open yet at this point whether or not the two sides will actually join simply for development reasons. Like, would it be better to have them always separate and just lit up or not lit up? These are all considerations that are on the table right now and we'll keep talking about. Russ: But here's the question, Doc. Isn't this something right now that only people at the Harvard University Berkman Center care a lot about? And there are a few others--I don't mean to suggest it's a Cambridge, MA phenomenon. But most of us, perhaps foolishly, just go about our business. We let Amazon take our information, we let Google take our information. When iTunes revises itself and sends me that awful revised I-agree thing, I just stupidly click it. Am I being stupid? Most people I think, they like the way the Internet works right now. And I would suggest that what keeps companies from exploiting this--maybe they already exploit it in ways that I don't know about that would really upset me and I'm just not paying enough attention--but mainly what protects me from them is their reputation. If Amazon did some really awful things with my computer or with my data, I'd want to not go there any more, and I'd stop buying from them. Isn't that right now what keeps them from exploiting that relationship? And do I really want to pay attention every time that thing turns gray, or--which is going to be a lot if they are changing their terms every once in a while, which they usually do. How is that going to work? Guest: Well, first, sure, we've all acquiesced to the norms in the marketplace now. And that's not so bad necessarily, as norms go. They are just early[?]. We found some things in 1995 that worked pretty well that are actually stuck. I think a lot more opportunity will start to open up when, for example, we start coming with our own data--[?] talk right now about big data, and I deal with it in the book to some degree--which as always, with almost every new computing movement is something that's discussed and imagined out as something only big companies do. But let's say that we're in charge of our own RFQ[?] data, we're in charge of our own financial data, in ways that are coherent and we can manage them very easily. And we bring those to the marketplace and we can establish relationships based on what we're bringing to the table and not just what the other side allows us to bring to the table. |
| 15:15 | Russ: Well, let's go back to your traveling woman, which I think will help us put this in context. Nice example. So, she wakes up; she's got this sleep monitor on her, so she's monitoring her own sleep and she wakes up refreshed because she's gotten up at a good time with respect to her sleep patterns. And she's going to take a trip that day, right? So, tell us what happens to her. Guest: Looking at the book as we're talking. And I want to go back and say, by the way, that there are very few people in Cambridge, at Harvard, that actually care about the work that I do. It's not because they don't care--they certainly care that the work is going on. But mostly what we've done is encourage this development all over the world. Russ: I understand. Guest: Most of it seems to be happening in Europe or on the West Coast or in Salt Lake City, or places like that. Russ: I hear you. Guest: And this legal thing is just basically a small hurdle and I'd like to treat it with the lack of full respect it deserves. Because it's a bug. Right now, there are bugs in that system, and we need to debug the system and so we're working on the system. The main thing is that she's in charge of her data, and she has relationships with what we're starting to call 'fourth parties'--which are third parties which are working for us, or in this case for her that serve the same role for her data that a bag serves with our money. Russ: It's an intermediary. Guest: It's an intermediary. And it does some of the heavy lifting in casting out an intention [?], so if--and in the book we call this a personal Request for Proposal [RFP], which is a business-to-business term. Russ: Which stands for Request for Proposal. Guest: And RFQ is another one, Request for Quote. What's happened since the book came out is the term 'intent casting' has emerged, among developers, which is: she can cast an intent of her [?] for coffee. For example, I'm traveling, and I think a lot of us [?] of this from time to time, but rather than going on our phone and saying, Let's see, let's go to Google and see-- Russ: Search for coffee. Guest: Search for coffee. Or whatever. Russ: I actually have a Starbucks App, for my wife--it's not for me. I'm not a big coffee drinker. But my wife is a big coffee drinker, and she doesn't have a smart phone. So I have a Starbucks App on my smartphone, when we're traveling together, for her. Guest: And actually the idea for this came back when we were traveling across the country from Santa Barbara to Boston, and my wife also is a bigger coffee drinker than I am. I love coffee but my body can't handle more than a little bit of it for some reason. And we were thinking about what would work here: I want a short, double cappuccino, short dry cappuccino, two exits up. I can just put that intention out there and have the market find me, rather than I'm finding somebody in the marketplace. So that I don't have to--right now, of course, you can do this with Google Maps; and Google Maps, by the way, is a miraculous program in many ways. But it's all about sellers trying to find buyers. What about the buyers trying to find the sellers? Let's equip that. So what this woman does in this case is she basically orders a cappuccino ahead-- Russ: Ten minutes from now-- Guest: Ten minutes from now it's ready; she can drive through, pick it up. They only know about her what they need to know about her. But because she's very loyal to Peet's Coffee--which by the way, we are, it's by far the best of the chains--they know about that. They know that she's loyal already because she's told them she's loyal, not because she carries a Peet's Loyalty Card. And that's a bit of a state change, because the norm today is we have these loyalty cards. But the loyalty cards are mostly about the stores trying to trap [track?] you and ways you are switching costs, they call it, and other inconveniences like that, and so they can maintain data about you. Which is valuable data; but we have data about them, too, and that's valuable data to us. And that's where a fourth party can help us put things together if we are willing to pay for that. And there are a number of companies out there that are betting it will. But what this forms is genuine relationships, rather than coerced ones. And so that's one of the dreams that I've had about the free marketplace for some time, which is what happens when we have much more genuine and fewer coerced relationships? What starts to arise out of that? Is it just because I've got a personal pricing gun, which, if you look at a pricing gun, that's not something a customer uses. That old--the comedian, Steven Wright--says: I held up a store by going around with a pricing gun and marking everything in the place. It's that we're not used to having these things. We are going to have them. We are going to be able to say: I'm willing to pay this or pay that. |
| 20:50 | Russ: So Priceline has a little bit of this. Just to take a silly kind of example, Siri, the Apple App: You can talk to your smart phone now and say, I'm thirsty or I'm hungry. And Siri--the directions still are of a particular kind, but Siri then delivers you a bunch of choices. But the choices aren't known to the recipients. The restaurants that it tells me about, they don't know they are being chosen by Siri. And you are suggesting a world where I would say into my phone, I would intent-cast: I'm hungry; and a bunch of restaurants would start waving opportunities at me, knowing and having a relationship with me from the past, that we have agreed on. That's the idea of it, right? Guest: That's part of it, sure. The main idea is: What happens when we can advertise our interests and intentions? Whether it's very specific, such as, I want a double cappuccino, or whether it's very vague, such as, I'm hungry. Obviously as you say, with Siri--which I don't have on my phone-- Russ: I don't either. Guest: [?] and not one of the more recent ones-- Russ: Me, too. Guest: It's still, the portfolio of knowledge that it has is, except for 'I'm hungry' on the customer's side, all these things that it either guesses at or may know because Apple or somebody has a relationship with these companies--they are drawn entirely from the sell side of the marketplace. And my belief and the belief of a number of other developers is that we can match a lot more up if there's more data and there's more granularity of the ability to express intent on the customer's side than we have now. And so let's play with that. And there are lots of ways that can play out. The easy and trivial examples are [?] like Priceline. The problem with Priceline is I have to use Priceline. What if I didn't have to use Priceline? What if I could use anybody? That's the main thing. Right now we are sort of stuck in the world that Jay Walker built when he designed Priceline in the first place. Which though it's very good, can say well, Priceline in a way was built to overcome the limits of Orbitz and Travelocity. Which, by the way, were invented to overcome the limits of United Airlines and American Airlines separately. Well, what if--if you take the airline example--I have this arcane interest as a very frequent flyer, which is that I love window seats; I like them [?] in front or behind the wing; I want to be on the shady side of the plane, and I'm actually willing to pay for that. I'm actually willing to pay for the window seat that I want. But that doesn't really fit into any of the airlines' existing systems. They know that I--United knows, alone, that I am a frequent flyer, that I should get a premium seat or be eligible for an automatic upgrade to business class if they haven't filled business class already. Which is kind of the default that they have. But there are kind of some conditions where I have to overcome that, I have to work at it. For example, I'm not a tall guy, I'm an average size guy, and I don't have long legs, so I can sit in the back of the plane. I don't need the premium seating if I'm not using my laptop, which I often am not. But with United, for example, which is my main airline, all of their 777s have the premium seats over the wing. Well, I can't see the ground over the wing. I don't want to sit over the wing. I want to sit in the back. I'm willing to pay for that. And their protocol is different. But the interesting thing is: What if I can send out the economic signal that I am willing to pay for these seats, guys? And for that matter, I don't have to be with United. I can be with some other airline if they give me what I want. And right now what we want is something that the airline gives out based on very big data, which they've been using for a very long time, and statistics that work entirely for their convenience, where they've really blocked out all possibility of extraneous input from customers. And I'm sure there are many who would say: You know, it's going to be too much trouble for them to embrace that extraneous input. But my belief is that there's enough really good signaling in there that they might change their systems incrementally once they start opening up to it. And that's really one of the directions that we're pushing with this stuff. Which is: if that fourth party maintains a list of all the intentions I have that are like the airline, or maybe like the weird cappuccino, or some other thing, and I can make that available to the sellers of the marketplace and others also make it available so that the sellers in the marketplace can look at that data and say: Well, wait a minute; it turns out there really are a lot more people that want window seats than we thought, and we can make adjustments based on that. The beat that we're working here is really economic signaling really, and enriching it on the customer's side rather than keeping it impoverished, which is what we've had for the last 150 years when mass marketing kind of ruled the world but the internet really challenges in a lot of ways. |
| 26:55 | Russ: Yeah, I love the idea--I think the best way for me to think about it is: Who is advertising to whom? So, in the current world, you walk down the street and people are waving stuff at you: Buy me! Use me! Come in here! And you are suggesting a world where I say: Appeal to me. Here's what I'm interested in. Make me an offer. And I think--the Priceline example is a good example because Priceline--which I don't use, by the way, for a bunch of reasons--but they created a playground for buyers and sellers to interact in a different way than they did in other playgrounds. And as you said, because it's a playground it's got a gate around it; and you have to play in their playground. And people who play in the playground play under their rules, and there's pluses and minuses to that. You are imagining a world where it's a little more open. Which really to me brings us to this fascinating question of: Where does innovation take place on the Internet? How open or closed--people are very upset, get very worked up over how we access--and I'm going to read you a quote from your book that I think captures this. You are talking about the Commons. You introduce the idea of a commons; you say These type of commons [you are talking about physical commons--RR] which had retained their essential qualities since Saxon times, came to a tragic end, destroyed by "enclosure" and similar takings by government and commercial interests. To sum it up, the commons lost when industry won the industrial revolution.And here's the key question: So, how can we respect these manorial companies' need to innovate and cause market growth as only they can, while still protecting the World Wide Commons we mostly access by their grace, and which to some degree they already consider at least partially enclosed for their own purposes?So, the question there is, we get on the Internet using Comcast or Verizon or whatever place we go through. When we're on the Internet, we're inside these little places--Amazon or Priceline. And it seems to me that those restrictions are necessary to allow people to make the investments to make things better. How are we going to balance that problem? As you said. They have an actual desire to make money, and that's what they do, and they make investments expecting to make money. So they are going to expect things to be kind of closed. How do we make them more open on the lines you are imagining? Guest: Well, in the book I give examples of Apple and Google with smartphones, and how there really is an amazing symbiosis between two approaches that are orthogonal in the sense that Apple with its iOS Operating System, with its very closed, tightly controlled, vertical environment, highly verticalized, vector, they move vertically with that. And Google's [?] other, with Android; Google said: we're going to invent Android and Android can be used by any manufacturer. So there are many Android phones, where there's only one Apple phone. And we're going to open the marketplace horizontally. And I actually see these as two Etch A Sketch dials: one is very proprietary and very vertical, and has what you can only do in a vertical dimension, which is: you are controlling things. You do have your patents and you do exercise your intellectual property claims and you do try to enclose some things, while at the same time others, and even yourself in some ways, are going to open it up horizontally. And there are many ways that Apple works the horizontal thing as well. They actually do contribute to Open Source, [?]; they actually do use Open Standards and things like that. There are all these--I don't see it so much as a tug of war, though often there is a war of words, there's a war of lawsuits, and things like that. But as really two complementary urgings and strategies or strategic choices that individual companies can make and that the market makes together, somehow, that work out better for everybody because both those impulses are respected and exploited. So, and I think that, again as I think I said earlier, we're very early in this, in the development of the Internet. The Internet that we know today showed up really in 1995 [?] and the first commercial websites and commercial ISPs [internet service providers] and--by the way, we are very horizontal. Anybody can be our investomer[?]; you can come and go as you please; there are no contracts, or minimal contracts, and now an ISP means a phone company or a cable company. And the old ISPs are mostly gone. And those new ISPs that are very controlling and really very much want to verticalize the marketplace and control it for their own purposes are, you know, acting as monopolists. And that's--there are people who, my good friend Susan Crawford, who has a great new book out on this called Captive Audience, wants government relief, thinks that there is excessive market power here, it's throttling innovation; there is no competition for it right now in most places. I can only choose Time Warner if I'm here in New York. Most people can only choose from one cable company. |
| 33:34 | Russ: So why is that, though? Guest: Which 'that' are we talking about? Russ: The fact that there's only one. You said all the other ISPs disappeared. I'm not an expert on this, and I find it a bit bewildering. I read--I read a little bit about Susan Crawford's argument where she says things like: Comcast makes investments and expects them to make a profit. As if that's somehow outrageous. But that's what they do. That's what we want them to do. We want them to have a profit incentive. So I don't understand what's sinister. Help me understand what's sinister about the fact that there are companies trying to make the Internet, say, faster, so that I can get more broadband? What's the barrier to competition that allows them to exploit me as they move forward in that way? Guest: Well, there's--as it developed, if you wanted high speed internet at any point in time on a landline you had to get a particular company. The only phone company you could get it from was Verizon. And in places where there really is competition, that is a wonderful grace. In the apartment that we have in Massachusetts, I chose--because I saw three different kinds of fiber on the poles outside my house--and we have Verizon FIOS [fiber optic service] there; it has 25 megabits in both directions including upstream, and I upload a lot of photos, and so I wanted--and there was competition there. We chose Verizon over RCN because Verizon had much higher speed upstream than RCN had. And Comcast was not a player at that time because Comcast couldn't offer the upstream speed that we wanted. And we didn't care about TV. So there, there was a bit more of a complete marketplace in the sense that there were several competitors. But in most places, that doesn't exist. There's A cable company. Russ: Why? Why aren't there more? Why isn't Verizon competing in New York City? For your business? Guest: Oh, boy, this is really complicated. And it would be great to have Susan tell you what she thinks about this--I think it would be an interesting conversation. But I think the reason is they are industries right now, outside my house, at the moment I've actually talked to a lot of people at Verizon--the most interesting ones are the guys on the street who will tell you what is actually going on, rather than their marketing people who will say: Call this number; or fill out this webpage or something. But the real reason that they are not getting into this now is that [?] knows them and that they [?] are behind everything that they are trying to repair. On the south side of town. But they made a deal. They made a deal and I don't know what the deal was, but they stopped expanding FIOS. They stopped enlarging the FIOS footprint. We are in the FIOS footprint in New York, but we are not [?] fiber anywhere else in the country right now, and that decision that they made, as I understand it, was coincidental with their doing a deal with Comcast or one of the other cable companies for more wireless spectrum so that they can expand what they are doing with wireless. And what they are doing is in verticalizing the marketplace, they bought NBC Universal. So, what they want to do, one would assume, is basically make certain things available. The fear is that they will bias the Internet, they will turn the Internet into television. They are a TV company, in that sense. Comcast is a TV distribution company. They did not invent the Internet. They are not the ones whose innovations caused the Internet to exist. They are the ones that provided the pipes that made high speed delivery of those capacities available to us, but they are not the--their historic impulses have been toward limiting what you could do rather than maximizing what you could do. |
| 37:59 | Russ: But to the extent they do that, they might be unhappy! I understand the monopolist tendency-- Guest: But where can you go? If you are in a monopoly, where can you go? There can't be any other choice? Russ: No, I agree with that. The part that--let me just make an observation and then move on. This is probably, again, we've touched on this in a number of other podcasts and it's probably a subject for its own podcast by itself. But it just strikes me that I know how incredibly regulated this market is. The Federal Communications Commission [FCC] is deeply involved in this, trying to steer it constantly. So I find it weird when people complain it's not a free market. So I don't know--it's a complex system; I'm not quite sure what's holding a better world back, and I'm not sure I want the government trying to design one. That's all I'm going to say. I'll let you say--you can say one other thing in response to that and then I want to move on. Guest: Okay. Well, I'm in agreement with that. I devoted a whole section of the book to this topic because I believe the Internet is like the best thing that ever happened to the free marketplace. I think it is probably the biggest thing since moveable type. Russ: Or money. Guest: Or money. Russ: Coinage. Paper money. Guest: And credit. And credit cards, people who use credit. These are all great things. And the Internet, it puts in the middle of the marketplace an opportunity for countless connections and efficiencies and signal exchanges and the rest of it. And there is much to be gained by betting on that. Which is what Google has done. And Google did this thing, and this is what they did with Android. They didn't--Google would not do what Verizon and AT&T and most of the other duopolists that are out there have tended to do, which is offer something freely with very little constraint on it, in faith that they would get what they [?] second- and third-order effects. And they've gotten those. They created a much bigger market for smart phones than we would ever have if Apple alone offered what it does, and let's say if Samsung came along and said: Here's our phone and it's just as locked as Apple's phone and you have a choice between Apple's locked phone and Samsung's locked phone, and we're totally locked into either one of those systems and can barely get along with each other. Instead we have this incredibly vast and varied marketplace where--there actually, up the hill there's a place that looks like, I haven't checked it out totally, but it [?] Android phones. You could push a button and get an Android phone. That's an amazing thing. And that's because Google decided to bet on the horizontal, to say: Let's open this marketplace; let's do what we can do to make as many flowers bloom as possible, rather than to operate this private playground. And that's--they do operate private playgrounds; they do; they have many private playgrounds that are theirs alone. So I think there is a symbiosis between these things, and we don't have it yet with the Internet. The problem with the Internet right now is we don't know what it is. We really don't. We don't have a common vocabulary we are talking about. It's why we talk past each other. It's why the conversation is happening within the phone companies and then within the regulatory bodies, like the FCC and whatever, happening among the [?] people which are the ones that I tend to hang out with. They are very, very different. I just came from the Freedom to Connect Conference in Washington and the crowd that was there has very little in common with the--and 'in common,' I'm talking about in frames of reference and assumptions and vocabulary, and the rest of it, with those that are operating the phone and cable companies. It's just not there. Like, you know, they call them netheads and bellheads, and that's to some degree what they also call themselves, but they are totally different mentalities, and coming from very different places. And the interesting thing is that the ones playing the free market card, as it were, and know how to talk that jive, are the phone and the cable companies. And they are saying: We are the free marketplace. But they are busy trying to close as much of their marketplace as they can. And my case to them is: Wait a minute, guys; do the Google thing. Look at how much more can be gained in the marketplace if you are part of the rising tide that looks [?] all economic boats rather than trying to run canals across the ocean that this Internet was designed to be in the first place. |
| 43:03 | Russ: So this comes back to my last comment--which was going to be my last comment, but now obviously it's not. And I've talked about this before on the program. It fascinates me that people have emotional, ideological feelings about Google and Apple. And now your discussion of it really helps me understand it better. So, for example--I like Apple a lot, but a lot of people think they are evil because they are closed. And my answer has always been: Well, don't buy their products. And, as you point out, there's lots of choices. I think the problem with this issue of nethead versus bellhead, which is this issue of telephone-cable versus some other model, is that if you don't think you have a choice, then it is really a bad problem. So again, I think it comes back to this issue--there's nothing that stops another Apple-like firm from creating a closed system. And it would have to compete with Apple and Android and everybody else. And Google is free to offer its product, which some people prefer; a lot of people do. And my view is: In a marketplace, that's great. You can choose the more open experience, or the more closed experience because you trust the person who closed it for you--you like Steve Jobs, you like his aesthetic, his vision; you understand there are costs to it, but they are worth it. So what you--to me, this view that says: Oh, please, cable company, phone company, be more like Google--my answer is, my first answer is: Well, that's kind of up to them, and if you disagree, start your own. But if there are regulatory barriers to starting your own, or other barriers that we could imagine--we could talk about how important they are, fixed costs, etc.--but if those are the problems, there's a big difference between those two stories. That's all I'm saying. And that really helped--your examples really helped me understand that. Guest: Good. There [?] high barriers, and there is a very high degree of regulatory capture in telecommunications. Most of the federal FCC chairmen now work for phone and cable companies. It's a--the revolving door is there, and there's a very tight coupling between those. And it does lock out a lot of the innovations that are possible. But, I don't know how one competes with a standing cable company in a place like New York. If I wanted to do what I would love to do in New York, I don't know how to do that. I don't know how to make another Verizon that would do what I would like Verizon to actually do. But rather than demonize Verizon or demonize any of those, I want to talk to them and say: look at what you are not doing. Don't just talk about choice, but give people more choice than they've got right now. Most people don't want to choose between Tweedledee and Tweedledum, you know. They want to choose between Apple and Android. Or they want to choose between Android I and Android II. That was the basic [?] about the Androids, which was that you could have lots of different Androids. And that's--I saw that with Linux as well; the irony of that Linux is that it was seen as this sort of back-to-nature, lefty kind of thing. But in fact it was about as brutal a meritocracy as you could possibly imagine. You don't get [?]. It doesn't matter how well you know somebody: your code's not going to get into the code base unless it makes the code base better. Linux is designed to work for--everything. And there are lots of--Eric Raymond, who has been on your show and is a good friend of mine makes a really good case for this. He's a hardcore, free market libertarian who sees in Linux something that makes the market bigger and makes it work better. And that's basically what I'm trying to do with the Internet as well. It's just to open things up. But as for the regulatory side, boy, it's just a morass. I'm an optimist. I see the almost-empty glass as 1/100th full. Russ: Good for you. Guest: That's kind of what my attitude is toward what can happen here. But there are bad actors and bad impulses that we confront everywhere. The [?] choice can be presented, that's just an awesome thing. |
| 47:40 | Russ: I agree. Well, let's shift gears a little bit. You've got a--I like a description you have called NEA--Nobody owns it, that's the 'N'; Everybody can use it; and the 'A' is Anyone can improve it. So that would be language which is a wonderful emergent phenomenon we've talked about before on the program. So, language--nobody owns the English language. Anybody can use it freely. And you can improve it: if you can think of a new word, then it gets added to it and that's the way it goes. It moves forward. It's alive. How do such things flourish on the Internet? Guest: The Internet basically grew out of that impulse. And so did Linux and the entire Open Source and free software world. And actually, NEA is just my summary of it. There is this stuff--a lot of it is owned, but it's owned like an open commons is owned-- Russ: It's not exclusive. Guest: Exactly. And I've just enjoyed looking at what these things are and what they make possible [?]. Studied the [?] of free software world and the open source world, and even [?] interesting thing. There are two things to look at here. One is that we were not talking about open source before February 1998. Eric and a bunch of other advocates got together and decided: We are going to start talking about open source, and open source is going to become part of the lexicon that we use to understand this kind of code and what it does in the world. And now it's one of those things that nobody owns, everybody can use, and everybody does use; and anyone can improve. If any one of us wants to improve the way open source is understood, that's a possibility. And that's true with words, as well. Somebody told me--and I really hope, maybe somebody in the audience can remark on this on the blog when we're done--I had been told that English, one reason English has proliferated, is that it is unusually accepting of new words and of, not just neologisms but new forms of usage and conventions. And other more formalized languages, like French, for example: not only the culture but the government and up, they are very conscious about what words are admitted into the language and which are not. I mean, it's impossible to fully control that but French [?] is more verticalized than English is. Russ: I've written about this, and I've talked about it on the program, but the French actually have a committee as to what is good French, I think it's the Académie française. The people who are members of that committee--this is my favorite thing about this. I have a few favorite things but this is one of them, which is they are called 'les immortels'--the immortals. A modest name. It really takes academic credentialism to a new height. So these are the immortals. And they decree that Friday and Saturday are called 'fin de semaine', which means 'end of the week.' But people in France call it 'les weekend' despite that committee's insistence. And so--but I take your point. And I think it's a cultural point. I don't think it's literally a control point by the Académie--I think it's just maybe French culture is different from American culture, British culture. But it's clear that English, the English language--all languages are alive, is my point. But the English language is particularly alive. Guest: It is. And I think as more other cultures fall into it that it becomes more alive. I bring up briefly in the book the Geoffrey West case about cities. I don't know if you've ever had him on the show. Russ: I have not. Guest: He'd be worth having. Just for this one question that he asks. It's on a TED talk, and that's Geoffrey with a 'G'. He's a physicist. And he asks this question: Why do cities live while companies die? And his case [?] is that, he's studied this, that companies tend to be closed systems; cities are open systems. And markets also; as parts of cities and city life, being open, not only are very admitting of new things but many more connections between things and processes and cultures. And things move faster. One of the things he says, I believe, in another talk is he can tell what city somebody is from--if you give him the average pace at which people move he can tell you what city they are from. Russ: The Henry Higgins of movement. Henry Higgins in My Fair Lady: Say a few words and I can tell you where you grew up. Guest: Exactly. Bigger cities, people move faster. And being in New York now, it is faster than Boston. And faster than San Francisco. It's not just that people are in a hurry, but that there's just more energy coming into what we're doing, and coming from more places and in more directions. Even in the interesting pauses that you always have in cities, like, where are we going to eat, are we doing Chinese tonight or something else, are we going to stop and look in our phones or look at Yelp to see what some of the ratings are of different restaurants? There's many more inputs and outputs in cities. And this is why open source has grown the way it has; it's why free software has done the same thing. And I want to see that happen--part of the work that I've done with VRM is encourage that done. I'm basically Johnny Idea Seed here; the only code I know is Morse. And so I'm not a very good developer in that sense. But I want to encourage things that embrace NEA, and also bring into the market things that allow [?]-like things to happen, you know, where you get increasing returns out of energy inputs rather than decreasing ones. It's this criticism of companies--as they get bigger and bigger and more [?]-bound, in a way that's very much a corollary to what Clayton Christensen says about the disrupted innovators and the dilemmas that they suffer--they literally can't take in this new input very well because they are too encumbered by their own size and corrupted by smoking their own exhaust for so long. Because they are closed systems. Russ: But, see, that's interesting because that's the creative destruction that keeps the whole system alive. That's why the marketplace is alive even though any company can die; and when a company dies it's not a tragedy. Guest: Absolutely. We need the companies to die. Living in Silicon Valley for 20-some years I got to see this so often; of course, you see it anywhere anyway. Companies die. All these people just disperse. But there is a change that the Internet has brought, which is, in Craig Burton's terms, a friend of mine I quote a good bit in the book, companies are turning inside out. And this is a wonderful thing of the Internet. There are these companies called APIs, which are Application Programming Interfaces. And we see the evidence of these in something like using a Twitter handle[?] to log in another site; or a better example is a Google map shows up in a real estate site. The real estate site has made an API to call Google and Google has served up the map. But what happens is that as companies turn inside out and expose their competencies on the outside in the form of these APIs, it makes a lot more things possible that are not necessarily evident in just looking at a website, for example. And in a similar way--and he sees that APIs are just going to become more abundant over time. What happens is that companies are inevitably going to be less secretive and less closed simply because making their competencies available for interaction, for live interaction, is going to make them possibly less subject to the failings that Clay Christensen talks about. That's a dream. That's not necessarily a reality. It's supposition on his part. But I think it's a good one, to noodle around with. |
| 57:23 | Guest: A good example with Verizon that I want to get into, the tarpit that we tiptoed around earlier, but a few months ago I wanted to upgrade something with my Verizon FIOS and I asked: Why is this, if you are actually able to give me 50 Megabits up and down, why can't I get that? And he said: Listen, those are the tech support cases. I'm an engineer. We can give you 100 Mmps (megabits per second) tomorrow, blow everybody else out of the water. But we're not doing that because Marketing won't let us. Now here's an engineer talking to a customer, and Marketing won't let them. Russ: That's wild. Guest: And Legal won't let them. This is one of the frictions involved in the legal thing we were talking about earlier on, that having these one-sided terms means that we have a whole floor full of lawyers, building full of lawyers--which is the case, say, in Hollywood, they do have whole buildings of lawyers--saying No to everything. When you have the heuristics of a company built in such a way that they can actually listen to the marketplace and react to it in real time in APIs, that's interesting. Where I could give a signal to Verizon, you know, look, I'm only going to be in this for another year, because I don't want to do the two-year contract; this actually was a problem; I want a one-year contract, so why don't you just take my money? I'll pay more for another year, and if that's a hard thing for you to do, you can just throw the switch and give me the higher bandwidth. But he couldn't do it because Marketing of all things wouldn't let him do it. Now I think because of the way the Internet is built there's a much more rich interaction we can have here. And this is the cool thing--and this is something I'd love to talk about--which is something that's come up much more since I wrote the book but which is mentioned in the book is the idea that we will all have our own personal APIs, where I can expose my own competencies: Here's my credit. I'm not a credit risk. I'm perfectly willing to say that. I might be willing to say I'm a frequent traveller. There's lots of things I can expose as an API. A big one for me, because I'm not young any more, is that I have a very rich medical history that I would love to make available through an API to any healthcare provider. When I was in Washington, you know, I'm still recovering from a cold, I wanted to ask some medical questions, I wanted to make some connections there. It would be nice if my API could make available to the medical establishment there what I might be looking for at a given time. We can start imagining that stuff out in an NEA world where nobody owns it and the anybody uses it side of it can open so anybody can improve it, and providers can step forward and say, I'm ready to deal with that. And I can start offering a business that will intermediate something in this space. But that's where I can broadcast--not just broadcast, I have the facility of my own that resembles that of a company in what I can do with it. Russ: That kind of brings us full circle. The way I hear what you are talking about, it's such a rich menu of possibilities, some of which are dreams, some of which are half-realities. I think they are going to come anyway. That's the optimist side of me. I think they are coming and what I see your mission in this book and your work doing is to maybe speed it up a little bit, help it along. Guest: Yeah. William F. Buckley once said, when he started National Review what his purpose was and he said to stand on the side of history yelling, Stop. And I see my role as to athwart history yelling, Hurry up. In the sense that I'm optimistic about this stuff. Just to complete the thought on that last one with APIs is those are part of what are now called personal clouds, and that's something that came up since I wrote the book. I just advise and would suggest to listeners that they look into personal clouds. That we each have our own cloud. We hear about 'The Cloud'--that the idea that we all have our own personal spaces on the Internet that are not grounded in a physical thing but rather are zones of competence that we maintain and can program or have others program for us--is really rich. And it's a fun topic to unravel in a future talk. |