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| 0:36 | Intro. Father's medical care at the end of his life. One thing to see statistics that suggest things are wrong with the American health care system, Hanson podcast, but quite another thing to see that up front. Father diagnosed with cancer of the esophagus late last year; political scientist, wouldn't live to the next election. But he probably died from an infection contracted in the hospital. Pain in ankle in early January, goes for x-ray; fell and broke hip. Emergency room; pin put in. Advised to walk around. History of cardiac problems, so put there, kept flat on his back and developed bed sores; died three months later. Sent to many different units in the interim. Incredible equipment, well-trained and caring people; but system failure and break-down. |
| 5:13 | Specialization; nature of health care system is that is not designed but it is tampered with. In the modern hospital, well-informed specialists, but lack of a generalist--someone in charge of the whole patient. Family members end up playing the role of general advocate. The specialization we observe is not particularly healthy and is not perhaps what we would observe in a less-interventionist system. Hammergren and Harkins' book quote: Doctors trained as individuals, rewarded for outcompeting classmates and colleagues, taught to be skeptical of others. Doesn't lend itself to team-oriented behaviors. Don't need team for broken leg or strep throat. Complex patients such as those with diabetes or late stage cancers do. Spontaneous order, corporate order, breakdown of order. Gas station example: lots of people, still no wait, got gas. Not a breakdown of order as in the late 1970s. Find order on Public Choice Theory, could go to Concise Encyclopedia of Economics, David Henderson, ed. planned that (corporate order). Wikipedia, Google, unplanned (spontaneous order). In health care, the complexities are overwhelming the spontaneous order. Body is a complex system. Hayek observation: by spontaneous order we don't mean a world with no planning--planning often takes place within corporate structure--the question is who does the planning. In the U.S. we've put up barriers that make it hard for the corporate order to work. Feedback mechanisms make it so that you don't get lemonade from the pump at the gas station--could sue them, they could go out of business. In hospital, no feedback if as a result of one specialist curing a heart attack he gives the patient an infection. |
| 15:33 | Simple business process level: people who have been in a business world. Freddie Mac--buys mortgages from lenders and issues securities. Regional staff would sign contracts. Years later it would turn out that Freddie Mac was supposed to receive a lot of money, but only the regional staff knew. Ordinary business fixes this or the company goes out of business. Felt by company though not the customers; if customers feel it, they go somewhere else. In health care, a business consultant would suggest all kinds of reorganizations, process changes, etc. that would produce better outcomes. Why doesn't this happen? This problem is relatively new. Patients are older and there are more often multiple causes. [Podcast taped June 18, Tim Russert passed away from a heart attack a few days ago.] Diabetes; chronic illness; more things people expect to be treated for--child doesn't sit still at school. Lone wolf or specialized doctor, though, hasn't changed. Need for more team-oriented approach with patient at center. Skyscraper has architect and project manager. That role is missing in health care. Could just be it's really hard. Making a car is a complex process; it's become a more team experience with a goal of preventing defects. Washington U., St. Louis, excellent, research hospital, Chuck Knight, head of Emerson, emergent not top-down corporate culture. Why is it that when you walk into a hospital today as an elderly person you don't get an advocate--a shepherd? Family member plays that role but is emotional and doesn't know the hospital structure. Maybe it's not productive or too expensive, patients won't pay for it. Tradition is that a doctor should be in charge. Would be very resource costly. Who pays for it? Hospital administration consists of people making sure the hospital gets paid: Medicare or private insurance. Customer is Medicare or the customer. Medicare, Washington, DC, has other goals, doesn't think. Pay for performance: define what's a good outcome and good procedures and reward hospitals and doctors for doing that. Reporting problem. Father's death certificate lists esophageal cancer. But he probably died of infections. Hospital didn't want to get dinged. Reports get manipulated when you try to manage from a long distance. |
| 27:24 | Political and economic interface: moral quandary. Want people to be taken care of but the political process, either via the electorate or by special interests, we've moved into an imperfect system. How do you get from there to, say, a second-best, more effective solution? Basic moral quandary of health care: we instinctively want it to be free but we understand that the providers need to be paid. Moral repugnance to charging someone money if he is in distress. Usury laws developed from this. Set up a layer of insulation. In industrialized world, health care spending paid for by other parties. Here about 40% government. Patient is not the customer for that portion. Goal: remove some of that insulation. Lasik surgery, typically not covered by insurance or welfare programs; Lasik has gotten cheaper and better, profit motive, self-paid, advertising. Doesn't seem to be a powerful model that people have noticed has worked. Also: doctors are kings in the current system; main focus politically is to make sure they get paid. One excuse people give for health care being different is that it is complex. Computers are also complex; there are devices that work--competition, brand names, review articles. Could work in health care but we don't use them, not paying for it. Neat to see how resistant people are to the notion of paying for health care. A lot of the health care services we buy, such as Lasik or colonoscopy screening, are not in moments of distress. Elective. Even in distress you have more choices about how it can be dealt with. Temptation to say health care demand curve is vertical. People put off colonoscopy screenings because they are unpleasant; turned out for Russ to not be so horrible, took pills not liquid. Is it imaginable to get to a different world? Bootlegger and Baptist problem. A lot of general propaganda saying that good health insurance covers more. Economist would say it should cover less, just catastrophic insurance. |
| 39:54 | The uninsured. You hear that they are at risk. Employer-provided health insurance is unraveling, huge wage differentials, people who are healthy leave to become consultants and have more take-home pay. Medicare, bankrupt. Enormous structural deficits forecast as population ages. Not much of a crisis in the sense that we'll do something different--lower benefits, raise tax rates. The problem that looms is the political fight. Stein's Law: something can't go on forever. Health care spending rising relative to GDP has to stop eventually if only on arithmetical impossibility. Longevity is going up. Most tempting way to resolve it is to keep clamping down on reimbursements to doctors under Medicare. Net result is doctors are leaving the system. Headed toward a two-tier system. Question of how we get there. People who use the government funds get poorer choices, fewer doctors; others pay more and more and have more choices. Medicare is government program deals with the elderly; Medicaid deals with the non-poor elderly. |
| 46:02 | Most doctors don't feel like kings. Disillusioned, angry, bitter. Medicare bureaucrat or lawyer suing them is the king. Hammergren and Harkins' book quote: Average physician statistics, burdensome system for doctors. Why is it that we don't have this shepherd or project manager in charge? Doctor doesn't want to give up control. Have to reconcile their desire to have a more sensible workload with the need to be in control, allow others to be in charge of, say, prescriptions. Could have a doctor who is more of a generalist. Everyone is within his own silo, his own unit. Atul Gawande, a doctor, article: patient goes to doctor, has tumor, but instead gerontologist's first question is for patient to take off her shoes and look at her toenails. Can't clip her toenails, so at risk of falling down and being unable to get up. Need more gerontologists. In fact the number is decreasing. Shannon Brownlee's book, Overtreated. Take off your socks is not a procedure, so doctor's can't bill for it as a procedure. We are treating doctors based on what they do rather than the outcomes. We pay them by the code, by filling out the forms properly. We've created a breakdown. |
| 54:29 | Arnold's father as political scientist. Believed in interest-group politics, viewed it as the rational core. Baseball fans in St. Louis: 8th inning, close game, less than two out: squeeze bunt here? That's the way the game's supposed to be played. Viewed interest groups as the way the political game's supposed to be played. Saw it as the natural order of things. Don't expect that if your favorite white knight or African American knight is elected that things will change. People on the insider of politics scratch each others' backs; on the outside. Libertarians like those who throw brick through the window; but maybe you can affect the system more by joining them. |
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| 0:36 | Intro. Southern California is prone to periodic water crises, droughts. It doesn't rain much there. Isn't that the source of the problem? Only rains about 11 inches a year, desert climate. But it also doesn't rain Mercedes Benz or Snickers in CA. Maybe the price has something to do with it. Price changes with supply and demand for those products. If you have unusual droughts in southern CA, the price is not allowed to rise--it is government controlled, so likely to get these shortages. Public officials appeal to people to cut back on water. Cuts consumption maybe 3-5%. If you hear other people cutting back you might even increase your consumption because there is more available; or might take water now before they send out the water police. Georgia. In Irvine you got a ticket for leaving your garage door open too long. Association contract rules. Grass police. The way your yard looks can affect the surrounding neighborhood but not widely enforced. Irvine does prove that perfection is overrated. Company town, medium strips mowed and edged. |
| 6:50 | Water problem: Last week talked about peak oil; a lot of people see it as an engineering problem but it's an economics problem. Everything is scarce. No incentive for people to conserve. Gasoline situation--with price controls in early 1970s we had long lines and shortages. Tankers even changed course and went to Europe because they found they could get a better deal there. Even fistfights at gas stations. A ten-year-old girl started selling $10 coupons in advance and then disappeared--might be apocryphal story. It doesn't matter whether we are running out of oil soon or in 50 years or a thousand years--there isn't enough oil to go around at a zero price. It is the role of price that makes it plentiful. If you control the price you will get less supply and more people standing in line. Wait time can even mean people are paying a higher price. Higher income earners in the 1970s paid teenagers to stand in line for them. Friedman: people haven't so much learned that price controls are bad so much as they just still remember the disruptions of the 1970s. |
| 13:06 | Flooding. Recent Iowa floods. In the event of floods should we feel sorry for those who are flooded? those who are nearby but not flooded? If you expect floods in the flood plain, you expect the value of property to be suppressed. The price differential should approximate the difference in losses when floods come. If the differential is too low people will continue to buy the hillside houses. If you have a flood that is not as serious as expected, the people in the flood plain got a benefit and those on the hillside paid too much. So, who you feel sorry for depends on what was anticipated. Suppose we start taxing the people on the hillside and use it to relieve those in the flood plain. Depreciates value of hillside property, more people will want to live in flood plain and will build bigger houses there and stocking them with better furniture; likely to have more newsworthy floods. Often people know that a flood is coming; if they know their damages will be covered by those on the hillside they have less incentive to pack up their belongings. John Stossel report on buying a house on NJ coast and puzzled to be covered against hurricanes by Federal subsidy even though hurricanes are known to come around. Law of unintended consequences. Benefits of these programs get capitalized and end up helping nobody. Can end up with no gains to the property owners. Anticipated flow of benefits of $20,000 by government would get captured in the value of the properties. |
| 22:29 | Taxicab market in Manhattan, have to have a medallion, license. Getting a medallion gives you the right to pick up people; increasing number of medallions penalizes those who previously saved. Gordon Tullock: transitionary gains trap. Farm subsidy: many farmers bought their land at prices inflated by anticipating the government subsidies lasting into the future. 9/11 issue: Terrorists have probably killed more Americans since 9/11. When they flew the planes into the towers people feared flying; wait times have gone up with inspections. So more people drive; and since highways are more deadly than flying you anticipate more deaths. Three Cornell economists found that highway travel went up and estimated that 1250 adults died in first 12 months after 9/11 who wouldn't have. High price of gasoline implies fewer accidents. Administration has to be careful about raising alert status because it lengthens lines and increases jitters, drives people to the highways, and cause more deaths. Alert is kept at orange all the time. Sign: Free beer tomorrow. Dwight Lee, U. of Georgia, Athens, GA, anecdote: Russ flew to Atlanta shortly after 9/11. Shuttle from airport was probably more dangerous than the flight. TSA is careful about how it allocates its resources: checking grandmothers and babies also lengthens lines. But its rules get well known, so people can take advantage of that, too. Judicious use, management problem to use rules without discretion. Not much incentive to reduce the length of the lines. You can't complain to them or they'll strip search you. |
| 33:52 | Why are there so many sales after Christmas? Standard answer: trying to get rid of particular inventories, maybe for tax purposes. But we observe storewide sales. Buyers typically aren't wrong about everything a store stocks, much less year after year. Many of these sales are planned--buyers place their orders back in July. Two different markets: urgency before Christmas; less urgency after Christmas. Inelastic demand before Christmas, more responsive after Christmas. Good form of price discrimination. Russ and John Lott, cost differences. Price discrimination is not necessarily the monopoly bad it's seen as. Car dealership podcast. Sign in a dealership: "If you want to haggle we'll raise the price so you can bargain it down and get a bargain." What is price discrimination? Firm has to have some pricing power, monopoly power. Item can't easily be resold or price discrimination would break down. Christmas would require a time machine to resell. If you start lowering your price after Christmas, can move date forward into pre-Christmas sales. Gift cards let receivers get some of the benefit of the sale. Definition is charging two different people different prices for the same good. Retail business is extremely competitive, same with restaurants. If you suggested to them that they have market power they would respond that it's unlikely. Response: fixed on idea of price competition being the only meaningful source competition. Schumpeter point: because there are economic profits to be made you have all of these goods to be made and people willing to risk a sizeable investment. Variety of goods. What if all the economic profit would evaporate once somebody created a product? Incentive for innovation. Non-price competition is important. Availability. Important way that stores compete is by keeping their shelves stocked. We are accustomed to seeing stock on the shelves. Stores don't want to run out of key items before Christmas, so overstock intentionally in advance. Airline ticket prices that go up at the last minute give a service to some people rather than just reserve the tickets and lose the money if not enough people buy them. |
| 47:22 | World of pricing is complicated. Even the players in the business don't understand it but are driven by competition to come up with a good strategy. Popcorn. Why is popcorn expensive? Standard answer is that movie theaters are monopolists and once you walk through the turnstile they can charge whatever they want. But then why not charge even more than they do? Movie industry is selling a bundled experience: movie and other things. Interplay between the take the studio gets, the movie price, and the popcorn price. This kind of pricing strategy is used at Starbucks, McDonalds, etc. A small bag of popcorn is about $1.37 an ounce for a small bag in southern CA, much more than filet mignon at Costco, about on a par with sirloin at Outback. As you go to the medium or the big tub, where you might even get less popcorn because the medium bag is flexible and can be stuffed. The medium is 50 cents more than the small bag and the tub is a dollar more but you get free refills. A lot of movie-goers don't seem to be aware of the refills. If you consume 3 tubs the cost of the popcorn goes way down. If they are making a good deal of profit from concessions they have an incentive to keep the price of tickets down so they can raise the price of popcorn. They bid for movies; typical contract gives about 70% of the gate receipts to the distributor. If they have a movie they think will be a blockbuster they'll bid more, even though the ticket price might remain the same. The reason they are willing to bid so much is their high margins from concessions once people are inside. |
| 56:10 | You don't have to go back to a theater that charges an unreasonable price. Theaters compete. Part of high margin may be that they are competing on getting access to the best movies. Part may be that the costs are not obvious. Labor cost, opportunity cost of space, people do bring in their own items in their pockets or eat before they come. Complex issue that looks like exploitation but is more complicated. Cost of popping the popcorn at home is about 50 cents; labor cost of their time, clean up, smuggle it into the theater adds up. Would it be better if you had a lot of popcorn vendors lined up along the walls? Fewer theaters would result. Money to be had in theaters creates market for good movies. Financial health of theaters. Theaters compete with sporting events, DVDs, home theaters. Thrill of seeing a movie with a bunch of people, and the unique flavor of movie popcorn. Smellable, audible edible. Some theaters will pop a bunch of popcorn just to get that smell. Concession counter is idle in one-screen theaters, but with multiple screens it is always busy. Empirical evidence. Multiscreen theaters should drive down the cost to the consumer, expect to see the relative price of popcorn falling over time. Efficiency gains are revealed in the film budgets. Strange that the price of popcorn and tickets are bundled that way. Would expect that movies would get more expensive over time--as we get wealthier we demand better movies; are we paying for them through the higher price of popcorn? |
| 1:06:42 | Supreme Court antitrust decisions have affected the distribution. Art de Vany, Hollywood Economics. 1948 decision, vertical integration and movies. Risky business, hard to predict what movies will succeed, extreme kurtosis. Hopeless ignorance of the future. Movies are inherently unique products. Depends on buzz and also what else comes out the same weekend. Prices don't vary for movies because theaters are concerned about jacking up the price and causing lower buzz and less attendance down the road. "Sex and the City" movie line three blocks long. If you have an actor who can guarantee success that actor is in a good position to charge a very high price. Women's dry cleaning costs more than men's--looks like price discrimination but there are lots of actual cost differences. These puzzles are very complicated. Economics gives you a thoughtful framework. Women are more likely to return their dry-cleaning for damages or re-cleaning than men. Keep drilling down. The arguments that people think are the right argument are not always right. Coupons, Procter and Gamble coupon cartel to suppress distribution of coupons, taken to court. |
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| 0:36 | Intro. The Price of Everything. Oil prices and price of gasoline. Demand for gasoline, tipping point: people think there is a psychological barrier after which people will cut back. Unlikely. Oil companies are profit-maximizing. If people didn't respond to prices, why wouldn't they just keep raising prices till people did start to respond? Demand curves slope downward to the right. At lower prices maybe the ways in which people are less noticeable but still there. Common perception is that demand curves are vertical: when price goes up people still drive, but they drive less. SUVs aren't selling very well; people might even move closer to work. Short run response will be different from the long run response. If people don't notice then maybe you can raise prices. Competition would tend to keep prices down. If competition causes gas prices to fall, it much be that people notice. Common mistake: price responds to consumer demand and producers' supply; and also has a feedback effect. Price has been rising over the last couple of years possibly because demand is increasing. In that case we expect prices to go up and for people to consume more. Error is to believe that it violates the law of demand for prices to go up and consumption to increase. What's happened in the U.S. is that our economy has slowed--still growing but at a slower pace--but other countries like China still have rapidly growing economies which is overcoming our slowdown. Want lower prices, not regulated; but having high prices doesn't mean our economy is being harmed. If in response to our prosperity we drive up the prices of energy, education, and housing, it means our economy is doing well, not poorly. Sign of prosperity. |
| 8:42 | Julian Simon points out that the one resource that has consistently risen in real value over time as opposed to falling in value (people find more oil, tungsten, alternatives) is human labor. Labor is a resource. The increased value of human labor over time reflects the increased productivity of labor; similarly for oil price rise its increased value reflects its increased productivity. Classic problem in economics: a fixed pool of a resource, the price should rise steadily over time, depending on assumptions of industry; but in a competitive industry its price will rise roughly at the rate of interest. Owners of the resource will take it out of the ground, sell it, and invest their money, getting interest, which by increasing the supply of the resource tends to drive its price down. Path of price has to be roughly equal to the rate of interest. Store it in the ground if price is rising faster than the rate of interest. Standard view is that it's natural for the price of oil and other resources to rise steadily over time. In actuality real world doesn't behave that way. Standard reason it doesn't is that in all of those models, the price of extraction is fixed. Certain technology for discovery and extraction. But in fact the prices of these technologies decline over time through ingenuity, so the prices of many natural resources fall over time. |
| 14:04 | Morris Adelman, MIT, article, predictions that supply of oil would soon run out, quote: "This time the wolf is here." Nothing in the current situation to suggest it is any different from the panic of the 1970s or early 1980s. Technically it's not true that the supply of oil is fixed. Can buy synthetic fuel oil at your local station. Also there is oil in shale which can be extracted. How we define what is oil has some variance. But put that aside. Imagine a mosquito coming down onto a blood-filled balloon. Should she worry that she will run out? If the balloon is the size of a marble, maybe. If it's the size of an Olympic sized swimming pool, no. We don't know how much oil there is. We keep finding more oil, better ways to extract it, consistent with the hypothesis that it could be the size of twenty Olympic sized swimming pools. Long term trend of reserves keeps climbing. It's not an unlimited resource but it acts like it is. Remaining reserves same as they were 30 years before despite using it. Have more inventories in the ground. Proved or known reserves are used to scare people. Analogous to how much food you have in your cupboard. No point to discovering more oil till prices start to rise or when the known reserves shrink, you go out and discover more. |
| 22:35 | Pistachio nuts, from The Invisible Heart: If you love pistachio nuts and are given a room full of them, you can invite all your friends; but you have to litter the room. Would you ever use them all up? Eventually the room would start to fill up with shells. Peak oil idea, that we are somehow now on the downward trend, non-economic concept. As the shells start to accumulate, there's always one more even in a bowl as you start to look, but after a while the price will rise. People want to hurry that along: rather than relying on the natural role of prices. We bet on ethanol since in the public mind we are running out of oil, we have to have alternatives. What are the alternatives? It comes totally naturally to the economy. We don't have to hurry it along. We are more likely to make a mistake if we try to hurry it along. Think of ethanol; synfuels, sinfuels. Decentralized, emergent incentives to invest are powerful incentives. Before oil there was coal. Jevons, Walras, Menger, co-discoverers of the marginal concept. Early doomsday story: From Jevons's The Coal Question--quote: "We cannot long continue" our current rate of progress. He determined there was no way oil could replace coal. When you look back on it 150 years later it's an absurd claim. In order for China and India to have an effective demand for oil they have to give up something for it. They are producing valuable things for this oil. We are made wealthier as a consequence. So our increased cost of acquiring oil is offset to some extent by the goods and services produced by these countries. Most of those gains though are captured by the oil producing nations. |
| 31:18 | People are alarmed all the same. Highlights human foible that we assume tomorrow will be like yesterday. Extrapolate to $5/gallon next year. But as in the past, innovation will help. Made this assumption about housing prices till a few years ago. Before George Bush the first people worried that he would do something to raise oil prices because oil prices were "way too low." We can imagine futures but not the future. Can never really get it right. Could people in 1950 imagine what was available in 1975? None of the advances were planned. Schumpeter, creative destruction: it's the very nature of creativity to be creative. All we know is that in the past genuine creativity has taken place and has genuinely increased the standard of living. We're confident it will yield something. But hard to debate because we don't know what will be yielded. Pistachio story: eventually we will leave oil in the ground. But that could be wrong, too. We could find such inexpensive ways to produce it that we just use it all up and turn to a (then cheap) alternative. But people have the view that the sky's always falling. We have probably evolved to be natural pessimists. In a world of strict resource constraints it's better to squirrel things away. Modern great society (Hayek's term) is different. Legitimate fear is that these fears will get translated into government policies. Bootleggers and the Baptists: let's make fuel out of food. Bootleggers, the corn farmers, make out like bandits from this fiasco. Policy has really bad unintended consequences. Even those originally behind it have started to have second thoughts; people who depend on corn have had to pay much more and are poorer. How long will it take for the government to change its policy? Private sector fixes errors quickly--new Coke, Edsel, Corfam. Sugar quotas in the U.S. benefit few and cost everyone more, but the quotas persist. |
| 42:42 | Perfect political storm right now: people are worried about global warming; people are worried about instability in the Middle East--immense feeling that something has to be done. If we could and if we could do it wisely, good idea. Unlikely that we can do it wisely. Should we sue foreign countries for not producing oil--as George Will pointed out, we'd have to sue ourselves for not drilling in nature preserves. What should our role as economists be? What ought we encourage? What should citizens ask of their politicians? Laissez faire doesn't lead to a perfect world either? On economic grounds, what would good policies be? Get rid of a lot of environmental restrictions on drilling. 1979 was last time of oil spill in Gulf of Mexico. Technology of protecting against spills has improved. Why can't we drill in ANWAR? Encouraging: lack of encouragement for price controls. Always a temptation to use price controls to make consumers happy; but also have a movement to raise prices. Politicians propose gas tax holiday; others propose very high gas taxes. Carbon tax issue: externality, global warming argument is that therefore we should raise taxes; even on pure static wealth conditions, we don't know that the taxes are not too high. Hard to do convincing calculations of whether the taxes are too high or too low or just right. Is the tax return to Uncle Sam higher than the profits made by oil companies for each gallon of oil? Might not be true. Right now oil companies are making record profits. None of this means that oil companies should be protected or coddled or that they are special. What do they do with the money? Give some to stockholders (Russ must own some via mutual shares); if you are really worried, buy their stock. Some goes to finding new oil. Not much goes to building new refineries--very expensive right now to build new ones so they expand existing ones. |
| 53:05 | It should be pointed out that these protections come at a cost. Thomas Sowell: reality is not optional. Limit drilling in ANWAR and off the cost and have different standards across states. Andy Morriss, Cafe Hayek reference, with co-author, article showing that market for gasoline has become very fragmented which makes it more expensive because of loss of economies of scale as different states make different rules. Prices reflect that underlying reality. Indian and Chinese demand for oil, our increased wealth that allows us to want and afford more SUVs are all part of that underlying reality. Some comes from distortions, but intervening to change the price is like shooting the messenger. |
| 56:17 | Julian Simon, more optimistic view, The Ultimate Resource, we should always take into account that we can rely on our brains. The human mind is the ultimate resource. Simon's empirical work. The State of Humanity, pollutants, tuberculosis, malaria, cholera, polio--in the developed world we've mostly wiped those things out, the very kind of pollutants that actually killed people. How free is our environment from things that kill, or cause major discomfort? Neighborhoods in U.S. today are the equivalent to sanitary operating rooms compared to 100 years ago. Capitalism is cleaning our environment. We're privileged to be able to worry about the pollutants we today worry about. Ironic that people worry about how dangerous current conditions are though our lifespans continue to increase. Nurse email to Boudreaux upbraided him for pointing out that more people die of cancer today than 100 years ago by noting that we live longer. You are going to die of something and you hope it will be relatively painless and a long time from now; and we've gotten better and better at that. |
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| 0:36 | Intro. Buying a new car, Toyota vs. Honda, decided on Honda Odyssy, went online to find the best price, called, drove to buy car. No haggle price didn't include everything--lots of other charges, pinstriping, mudflaps, destination charge. Stood up to leave, dealer went to talk to manager, and offered reduced price. Didn't like being lied to. Explanation: invoice price, removed $2000, removed the holdback--amount that the manufacturer pays the dealership when they sell a car, 2%--removed another $500. Why? Very competitive market: six Honda dealerships within 90 minutes. Extra $500 seems like taking a loss--how can you stay in business? Inventory: Selling '08 cars this month means that more than likely they'll be replaced with '09 cars. Want to have inventory large enough that someone walking in can find the car he wants and walk away with it. So the $500 is viewed as investment in higher-profit cars. |
| 6:56 | Offered to throw in the options; but also the destination price; and also offered the trade-in. Dealer had originally offered $1800, though CarMax price had offered $3000. Dealer made phone call to used car division, matched price of $3000. Destination price still stood, though. Frustrated by not knowing whether a better price really could be negotiation. About to spend $25,000 plus on a car but still didn't know if it was a good price. Instead of feeling exhilarated, felt like just went 10 rounds with Mohammed Ali. Why not more dealers who just really have a no-haggle price? A lot of consumers don't do their research, walk in unprepared, don't know a fair value for the car they are trading in. But what about that destination charge? Anonymous interview offer. Was there a little more room there? Maybe $100-$200 more. $365 net, net loss as it was; might have been worth it for allocation of 2009 cars; don't want people to voice negative experiences on the internet. Can't afford the possibility of letting the customer walk out so angry he'll broadcast it. Want good word of mouth. |
| 14:50 | How long have you been a sales manager? Seven years for Honda world. Average profit was about $900-$1000. Over last 4-5 years, with the Internet and high speeds, profit is now about $500-$600 now. What percentage of customers come in prepared? Recent study by Honda, 80-85% of customers who walk in have done some research on the Internet. That still means 15% who walk in haven't. Right to have a fair profit. Average profit is still only 2-3%, probably around the same percentage as Starbucks. Quality of the research people have done probably varies. Just because you read something on the Internet doesn't make it real--it's just your perception. Used car example: you could believe you got a lower price but it might just be a package deal. Many people walk in and ask for the best price with no trade-in. "Ultimately, unless you are prepared to buy the car without doing that, there's really no benefit." Taking away the opportunity for the dealership to look at the whole picture. On the buyer's side, though, confusing, have to learn two prices. How much time do you spend internally trying to figure out what price to offer? Honda is easy to price out because every Honda is built the same way. Have to look at incentive programs. |
| 22:13 | As we get closer to 2009, many buyers paid a premium above list to get that car. Swings in demand. Must be eager to get new year's model. At the end of the day, it's the consumer who controls the pricing. Honda Odyssey was a huge success, consumers were willing to pay more to not have to wait. Civic Hybrid: None in stock. Do you have meetings once a month? Easy to estimate that other dealers have similar inventory for Accord sedan vs. Accord coupe. How hot is that car right now. How do you decide how much to come down, when to say no? Sales person is not on salary, pretty strictly commission-based. How do you read the customer? Has the customer test-driven the car, has the salesman done a walk-around, is the customer prepared to do business, is there a possibility of doing business right now, e.g., husband or wife, young kid of 19 who might want parent there? Want to find time when all participants are present. Has the customer given you any indication of his thought process? How many dealerships have you been to? Have to start off MSRP (manufacturer's suggested retail price, sticker price) then. |
| 29:00 | Looked at same car at a competitor: liked that there are three basic cars, vs. Toyota--more choices, great, but more research. Competitor was simply not more aggressive. What did he do wrong? Probably didn't ask enough qualifying questions. Liked the low key approach, but he never got close to telling what the real price was. Probably misreading. Concerned with persona, ability to sell anything, mouth of the south, vs. being nice, possibility of missing the customer who walks in and is ready to buy. Got to ask up front: are you prepared to do business right now? Job is to invest time. Product is the same everywhere; only thing different is the individual's time to get you over your perception when you walk into the dealership. Truth about trade-in quality. Buyers lie about trade-ins. Judgment calls, intelligent individual who had done research but was frustrated and might walk out and maybe not get a Honda at all. People come in with perceptions, expectations. Salesman's ability to empathize goes a long way. How often do you get involved? About 30-40% of the time, closer, coming to talk to people who say they are not ready to do anything right now, explore possibility if they would change their mind if we would do whatever. |
| 37:23 | Monitor salespeople? Does it just work itself out in commission differences? About $350 per car, more of a volume matter for sales consultants. Look at whole picture. Poor follow-up could still destroy customer base. People don't want to spend that much money and not have any follow-up. How's the car working out? People sometimes don't want to be bothered. Turnover in car business is probably second worst or worse than the restaurant business. Someone sells you a car today and three months later is no longer here. Find out birthdays is an easy one. Warm fuzzy feeling from people who find out about you. What does a great salesperson make? Somewhere between $20,000-$30,000 a year; best make six figures. Someone who wants to make it a career look into referrals, treating it like a business. Previously small air duct business, started by thinking of it as a transient job. First customer even bought him a bottle of wine every Christmas thereafter, adopted child from Africa. Took about four months to understand the whole process. Pleasing the customer vs. consumers' needing a little push to get them going in the right direction. Saturday meeting, the huddle, lay out the floor plan; General Sales Manager mentioned his name, build a community amongst sales managers. Big desire to be successful. How is your compensation set? 100% commission. Clean up problems as well as doing sales; back end: financing. |
| 47:02 | Seemed to take a loss. Salesperson didn't take a loss: got a flat, got $100. Could spend 6 hours or 10 minutes and get that. Manager gets .01% of the profit of the store. In Russ's case after taking all those things off, was it a personal investment? Incentive to sell cars every single day. Main responsibility is to the salesman, else his time is for naught. Don't want to have to train a new salesperson. Why didn't salesperson tell the truth over the phone? Can't sell over the phone. Have to get the person in to the office. Got him there as a gray area. Would you have taken the time to come in here otherwise? Got to play both sides of the coin. |
| 52:56 | Gap between sticker price and haggled price: some customers are better informed. But also some come in and get some knocked off and feel great. Ignorance is bliss. Why are cars different from shirts? Grocery store, no negotiation. Only cars and houses negotiated. Why doesn't competition among dealers just force the price down to the same price? Saturn. Why isn't that more widespread? One answer: Customers get exploited. Second answer: unclear at any one time what the right price is, unclear what the market conditions are, what demand for 2009 cars are. World with more information, difference between buyers and sellers. We remember haggling, taught to want to negotiate cars, good negotiator will save you money. Attempts to have one prices have failed miserably because people will go elsewhere. Conditioned to do that from an early age, but not for milk. CarMax, cultural norm, interesting that it persists. Pride with kids, but also flip side. Self-fulfilling prophecy, whether you buy a car or don't buy a car. Grand Caravan, five sales-people, loyalty, one gone, turnover. |
| 1:03:32 | Tricky things that buyers do. "I was told this price" from another dealer. People take what they hear and only hear what they want to hear. Taxes, tags. Perceptions. Trade-ins, truthfulness. Customer who says a car had never been in an accident, CarFax, easy to check. Leasing. Trouble figuring out if it's a good deal. No different than buying a car. At the end of the period you have options and can go pick out another car or refinancing it. On a conventional buy, you are not paying your first payment for 45 days, so you have interest at 100 percent principal. What proportion are lease? Close to 50%. Low. Total disclosure now. Money factor vs. APR, could equate to a 20% interest rate. Take your money factor, multiply by 2400. |
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| 0:36 | Intro. Gold standard. What's wrong with the Fed's handling of the money supply? John Maynard Keynes condemned the gold standard. Alan Greenspan wrote "Gold and Economic Freedom," making the case for gold: under a gold standard we would no longer have business cycles; under a gold standard a free banking system stands as protector, balanced economic growth. Unlimited expansion of credit would come to an end, government cannot monetize its spending deficit. Reagan, Cheney: "deficits don't matter." Would make government more accountable to people. Galloping inflation of the sort that plagued us in the 1970s would not occur. Disinflation, Greenspan now acknowledges that some of those benefits can come to an end, cheap labor from China would already be achieved; tsunami of Medicaid and Medicare. Federal Reserve has been lucky. |
| 5:35 | Deficits: Sometimes beneficial to spread payments over time, so sometimes government borrowing is rational. Concern is that we fund things that that are not beneficial. What matters is what we spend the money on. So isn't it a budgeting problem, not a central bank problem? Government is supposed to raise money through taxes and through limited borrowing against future taxes. Could hardly make the statement that deficits don't matter--Cheney could only say that as a Federal government politician. If he'd been in charge of a business or buying a house or a municipal government official, he could not make the statement that deficits don't matter--only the Federal government can monetize the debt. Friedman made the point that government spending is like dealing with a teenager. Government doesn't spend according to needs--whenever it can get money it will spend it. When deficits don't matter government can fight wars and make promises knowing it can ultimately print the money. Textbook model: private sector doesn't do all things well; government has to step in to correct externalities. Reality of incentives faced by politicians differs from textbook model. |
| 10:53 | Monetizing the debt, Meltzer podcast. What does the Fed do to monetize the debt? Johnson case: those were the days before one of the major reforms, 1985, indexing income tax brackets to inflation. Before that reform expanding the money supply boosted nominal incomes, pulling people into higher tax brackets (even 70%), which increased government revenue. We still have that mechanism to some extent, some potential for bracket creep, higher nominal income within a bracket still means more taxes paid. State tax level is not indexed. Federal Reserve can monetize the debt through its open market operations, buying the Federal government's debt and pumping money into the economy. This has become less important recently; about half the increase of the debts has been taken up by foreign official holdings, such as the Central Bank of China. General Accounting Office (GAO) makes some of these data available. Is that a bad thing that the Bank of China buys U.S. Treasury Bonds? They're financing the teenager. Interest rates have stayed low because of foreign willingness to hold Federal debt. Also bad if we don't like what the Federal Government is spending its money on. Can wage war, have guns and butter, Medicare Part D, endless giveaways. Cheney may not have understood the mechanism, but he could only say what he said as a federal official. Deficits allow the government to pay for activities today with taxes tomorrow. Monetization part has been relatively unimportant because of China's willingness to hold our bonds--it's a benefit. Inflation in recent years has remained relatively low as a consequence. If we couldn't count on foreign officials lending us the money perhaps the cost of government spending would have caused us to spend less. If they stop we may find ourselves in a situation where we may have to inflate. |
| 21:38 | Alternative view: gold advocate George Reisman: When the government need not obtain its funds from the people, but instead can supply the people with funds, it can no longer easily be viewed as deriving its powers and rights from the people. We vote with our taxes; we know we have to make sacrifices when the government buys things, resources are being taken from us. With the ability to print money either by our own Federal Reserve or by foreign central banks, we don't feel it. But don't we feel it? Some policies make it easier for us to respond than others. Future tax payments are less noticeable than current tax payments, writing a check is less noticeable than paying cash. As inflation gets high people yell. In the current situation much of the deficit financing of the last 20 years has not been through monetization of the debt but by individuals and foreigners who buy those bonds. Prefer to live in a society where we feel the cost when we vote for something. Money printing as an escape valve. Not everybody even understands that inflation comes from the increase in the money supply. |
| 26:00 | Empirical question of how costly the ability of the Fed to monetize has been. Last 50 years, Fed has surprisingly decent track record. Relatively stable output, dampened business cycles, unemployment stays in narrow bounds. Not all attributable to the Fed, but we've had no hyperinflation, relatively low and stable inflation despite bad period in the 1970s. Barron's readers tend to be dour about the economy than Epstein. Main problem with regime is that it makes it much easier for the government to finance wars. WWI. Setting that aside, from 1947-2007, National Bureau of Economic Research (NBER) shows that nearly 9 were years of contraction, 51 were years of growth. We'd be 40% richer but for those 9 lost years. Several years of double-digit unemployment in the 1980s, though relatively low 5% unemployment rate now; but a lot of human anguish with foreclosures. "Growth recessions"--period in which the economy grows but not fast enough to prevent the unemployment rate from rising. What does that have to do with the Fed versus a gold standard? Ironic: we're talking about the Austrian theory of the business cycle. Hayek, Nobel Prize 1974. If you actually read mainstream economists we are all Austrians. The housing bubble, the Internet bubble were essentially due to the expansion of credit. Kindleberger, Manias, Panics, and Crashes, "speculative manias gather speed because of an expansion of money and credit." Not an Austrian but he sounds like one. What can we do to prevent the expansion of credit. If all the governments of the world agree to go back to gold, not the way they did historically, which allowed banks to be protected in their expansions of credit. War of 1812 financed by banks, spent in New England to purchase armaments, which went to Government and asked for redemption in gold. Should have a simple rule: we're on a gold standard and banks should be required to keep 100% reserves, warehouses for gold. Pound sterling, dollar originally thaler. We don't allow the warehouse to lend part of the wheat out to someone else. The wheat is fungible, but it can't be given away on loan. Bank could sell us on the idea of saving some of it, giving out certificates of deposit, looking for people to lend it to. It would become impossible to lend money based upon demand balances. Money couldn't expand beyond the savings decisions people make. Speculative bubbles would be possible but less likely. |
| 39:15 | We had many speculative bubbles historically. Federal Reserve didn't invent the idea of lending beyond savings decisions. Greenspan. Economists became powerful people as chairmen of the Fed. Fed starting in 1913. Part of the reason there were speculative bubbles was because there were flows of gold in and out of countries; discoveries of gold and silver in the New World inflated the price level in Europe. Gold standard doesn't insulate us from that. Institutional issue: in the past under a gold standard the nations of the world agreed to move to a gold standard, classical period 1880-1913, in that period prices were more stable but we did have business cycles. So, in those times the institutional standards are not the ones being advocated here. Occam's Razor, simple arguments are best: plausible argument that if you keep the government out of the printing of money then other banks will force a bank that expands too much to contract, bank runs. 100% backing has almost never been the case in the history of the gold standard. Historically there were Balance of Payments deficits and surpluses that were settled with gold flows. Hume, countries call each other to account. Bank run will happen if a bank doesn't back 100% because other banks will insist that it honor its certificates. Just simplify it by saying let's treat banks as warehouses. Reader letter: with alchemy and modern technology they can maybe find a way to create new gold. Can't rule out the possibility that there would be some disruption but nothing like the disruptions that plague other countries, or even this one. No Great Depression in the last 60 years, 4.6 trillion in lost GDP, wrenching foreclosures and bankruptcies but not 25% unemployment. Then the U.S. can do even better on the kind of gold standard being spoken of. |
| 50:23 | Mainstream economist's argument: We don't have a very good understanding of what causes the business cycle. Sympathetic to the idea that credit distorts price signals as in the Austrian economy and that Fed's attempt to fine-tune the economy can be very disruptive. There are probably other causes of business cycles and we don't have a very good understanding of the causes. Empowering of economists through role of the Fed changes economists' incentives to be political and we should be skeptical of the mainstream view on that ground. 100% reserve requirement: Government's role would be to enforce contracts. Resource costs of providing the gold to back up that money: you have to accumulate a lot of gold. $200 billion estimate, Friedman. Illegal to hold (monetary) gold privately in the 1930s till 1975. Alternative costs would be jewelry, industrial uses; we have all those costs right now. Allowing just that some business cycles would be eliminated, that's worth something. |
| 55:49 | How would we get there from here? Austrian insight--historically gold as money came from commodity, Mises, it's impossible otherwise. Cigarettes in POW camps. How do we get back to that world? People would use paper certificates backed by gold and store their gold. We would no longer have investment that would originate from the printing of money. Reinvested earnings by corporations. Personal savings is higher than reported. Plenty of savings would go on in that world but it would all be done prudently. Innovation would still occur. Commonly thought that the housing crisis can be blamed on the expansion of money and credit, not taught in classrooms. Internet bubble would have been impossible without the expansion of credit. Cannot claim that speculative bubbles could not occur without inflation--people can think assets are worth more than they are actually worth without inflation. Irrationally exuberant folks can still start bidding something up. Simply wouldn't be enough money and credit to create bubbles as large as the housing bubble or internet bubble. Less likely to lead to downturns. |
| 1:00:58 | Confession: Macroeconomics is complicated, trying to understand it. Government has kept its monetary activities constrained in part because of better understanding today. 100% gold reserve backing is politically unlikely. Is a world where more people advocated a gold standard possible? What would it take? Greater awareness can lead to change. Key rule about being an economics journalist is to ask dumb questions. Iraqi War objectors may object to the financing of it through the Fed. What can be done to make a more stable economy? Economists are now arguing that instability is due to the Fed. Paul Volker, high priesthood of Federal Reserve chairmen aiming at only low inflation. Greenspan, Bernanke. Galloping inflation could return by 2030. |
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| 0:36 | Intro. Signalling: people spend resources to convey information about themselves to others. Health care: doctors have incentives that may not lead to the best outcomes. Compare to auto mechanics or plumbers, complex systems, have tools and specialized knowledge; have to judge if they are trying to get you to do more than you want. Often blame the plumber or mechanic, but we don't treat doctors that way. We are quite unwilling to blame doctors if we go the doctor and get worse. Doctors' self-interest may be to protect themselves from lawsuits; may be pecuniary. Collect a lot of puzzles and try to find theory that explains all of them as opposed to explaining one puzzle at a time. Doctors probably wash their hands less frequently than they should, but we don't ask doctors if they washed their hands when they don't wash their hands in front of us. Mechanics often ask if you want the used part--nice gesture. Websites now have track records, data on doctors and hospitals. People don't want to think about if their doctor may not be the best. Difficult to measure with doctors, easier with hospitals. Medicine's different--we have emotional beliefs that keep us from doing the best thing for ourselves. Wanting high quality doctors is not the same as wanting doctors with good track records. Innovation: stock of old established treatments. Most of the old treatments are a bad idea; we only keep the ideas that work out. For any different treatment, the hospital that does it more often has the better track record. But on average large hospitals are not better for you because large hospitals do things that small hospitals don't do at all. Resist the newest thing. Social status for having the latest thing, latest doctor. We get too much as often as we get too little; on the margin no correlation between the information we get and our health. |
| 9:50 | Cultural theory of why we waste money on medicine. We evolved habits to signal associates that we are available to them. When someone is sick it's not a good time to signal them; caring for someone who is ill is a signal of allegiance. Defended in earlier podcast. Application to doctors: People don't seem to be interested in statistics on auto mechanics or plumbers either. Most people rely on word of mouth rather than statistical systems, or first impressions when person gives them an initial estimate. Evaluation services are not thriving. Medicine is weird; everything is weird compared to our simplest theories of what people should be doing; medicine is just weirder. A lot of noise in the data: hard to perceive who is a quality mechanic, so rules of thumb work better. Are there grounds to rely on data for doctors? If we had no other theory to go on we would say that. How about real estate agents, who get 6%? Buyer's agent gets more the more you pay for your house--wrong incentive. Look overall at human behavior; look at tiger, makes sense mostly, true for most animals; look at people from a bird's eye view, see them doing all these strange things, random conversations about abstract things, have parties, go on long hikes--nothing to do with eating, reproducing. Signalling. Our lack of zeal in evaluating our doctors is a burden we carry with us from our evolutionary past. |
| 17:46 | Our ancestors' world was largely other people in the same tribe. Main environment was shifting coalitions within the tribe. Present yourself as someone you wouldn't want to cross and try to infer who would make a desirable ally: ability and loyalty. Signalling behavior: try to present ourselves in the best light. Wouldn't select for those good at discerning who is lying? Amount of care you do is not just the amount that would be useful but the amount that signals that you care. Signalling explains over-amount of activity. Hospital visits are comforting, not so relevant to your care. Signals relevant of quality. On Valentine's Day you buy chocolates, not relevant for hunger; send signal about how much you care. Quality, brand. If the best chocolate is the cheapest, you might not buy it if the receiver doesn't know it's the best. Common signals of quality matter, not private signals of quality. Most of us are conscious at times of doing something for appearance's sake: nicer suit, better car--we segregate this as a minor part of our lives, special events. Counter-signalling--jeans by .dot executives. Actions we take are driven by huge complicated subconscious machinery to make us look good. Kids honestly love the board games they win; honest and sincere feeling to like what we do well at or look good at. Bridge-playing example. Sincere activities are driven by inherited signalling behavior. |
| 27:30 | Test: taking Sunday NY Times crossword puzzle to game while son is not up at bat and filling it in in pen is a kind of showing off. We also do things alone; sometimes talk about them to others. Charitable giving gives us a warm glow and others think well of us. Some people give in secret to try to convince themselves that it is not to show off, but not very vigilant about keeping it secret. Why are there any anonymous gifts? Someone could still see you doing something good. Called a cynical point of view. Suggests everything that appears to be selfless or kind has an ulterior motive. But it could be a higher motive rather than a lower motive. Salesperson pretends to be your friend but really sells you a piece of junk. You don't want to say to someone who visits you in the hospital, "Thanks, but I know you are only doing it to signal me." Projecting of low motives is the wisdom of the old and jaded, the standard established view. Cynical view is not supposed to be voiced prominently. Have to ask: what's the motive of the cynic? Idealistic cynic vs. cynical cynic. Scorsese, "No Direction Home," Bob Dylan life, sanitized, get a little bit of disillusionment about Dylan as an artiste. In the documentary he comes across as somewhat opportunistic imitator of Woody Guthrie rather than political motives. Textbooks, public documents paint idealistic picture. We are susceptible to those claims when they are merely claims. Political rhetoric, claims to care about groups. |
| 37:44 | Waterproofer touts the fancy $30,000 system to waterproof the basement; why don't people treat politicians with the same skepticism? Like to separate the world into good people and bad people. Propaganda against the enemy. We think we are good, in part because we look inside ourselves and see high motives, not low motives. Don't see yourself very clearly. Murderer sees himself as good, high self-esteem. We don't think of ourselves as consciously choosing to talk to based on who can be most useful to them. EconTalk may get Hanson ahead. |
| 41:20 | Parenting. Want to see job as parent to help children become fully realized and to achieve their potential. Want them to be a little bit cynical because you don't want them to be prey. Balance. We like to teach our children to be more idealistic than we are. When they get older they are not as interested in our insights: we want them to keep naive innocence. When they want to become an artist, too far. We disagree with our children and we sincerely think we have their best interests at heart. We don't realize the other motives going on behind our behavior. Tell child not to run out in the street. Child wants to play the drums, parent convinced it's not his best skill. Loud drum playing might reduce sleep; might not impress parents' friends. Interests diverge a little. Even moderate divergence of interest can create a wedge in ability to communicate. What marks status, what indicates status? One key indicator is control, dominance. Suggests that the best way to show your dominance is to take people to a lousy restaurant. Competition among people should eliminate some of these forces. People have to adjust their dominance signals to the level they can get away with. |
| 49:50 | Education as signalling: claim that it doesn't help you become better at your job; merely is a way of informing employers about your quality as a potential worker. Mixture of functions, other components. We adjust our behavior in school to look as good as we can. The signalling part of school is a hurdle to jump. Some areas you might see a closer relationship between what is taught in school and what skills are used in job. Is there a cheaper way to convey my quality to a potential employer? College is very expensive; suggests that signalling is not all of it. Most people do not bring bank statements or doctor reports on a date, though those documents would demonstrate wealth and health. Instead we engage in inefficient signals. Difficulty of changing ancient habits. |
| 55:56 | Unease with monetary aspects of life. Non-market, non-capitalist motives viewed as superior by most people. Dinner at friend's house: bring $100 bill instead of the wine. What would you think of somebody who did that? If someone did something different, what would you infer? Why wouldn't I think more of someone who brought a $100 bill? Kind of relationship you think we have if you bring cash is what is being signalled. Maid is paid in cash. Long term debt: we like people to be in our debt. Short term vs. long term allegiance. Long term allegiance has to be about large debts, annual feast. Paying off immediately signals something about your intentions for the long term. But wine would be an immediate payoff, too. Why did bring a gift that complements the meal become a custom? Could offer after dinner to fix the person's toilet that you've noticed was running. |
| 1:02:15 | Imperfect information in the world. We want to convey information to cope with that. Ramifications beyond the immediate. A lot of people, though, think that signalling is wasteful and something should be done about it. Maybe there are better ways. Maybe the information is not so imperfect. Date is different from relationship with an employer. Market opportunities may emerge for showing employer those signalling kinds of information. In history of economics first papers were on education and insurance, moral hazard. Previously Adam Smith in the Theory of Moral Sentiments. Primary examples of excess signalling, but they may not be the best examples of signalling. Some market failure relative to world where we all know everything. Does that mean there is a scope for government regulation? Might just be the best we can do. Tax or discourage these activities, but realistically that will increase the noise in the signal. Expensive to court a mate; if you taxed it you'd reduce the activity but is that better? Parents choosing mates also didn't necessarily work, though that entailed signalling by the parents. Admirable activities, signal good characteristics, people do too much of it. Government could tax and discourage the admirable activities; but in fact governments do the opposite, encouraging the admirable activities. Aren't those admirable things areas that also provide positive externalities, so we wouldn't do enough of them? Research example. Communities like to look impressive to other communities, so signal by supporting arts, sports stadiums. Power politics, special interests. Subsidize farmers, perhaps because they are viewed as admirable |
| 1:11:49 | How can I use these insights to lead a better life, more profitable life, more honest life? If you want to understand the world, this is essential. Will it make me think better of myself? Theory suggests you are more base than you think. Should make me a wiser consumer. Could cut back on medicine, but then family will think I don't care about them. Limited options. Do we really want our children or ourselves to see everyone as self-interested? As social scientists it's a useful understanding of the world, but we like to think our spouses actually are kind. Religion. Essence of signal is self-deception. Part of the ability to be noble. |
| 1:15:37 | Hayek quote, from The Fatal Conceit. We have to have a certain schizophrenia in how we look at signalling. Truth-seeking, Descartes. Wouldn't we be better sometimes if we lived with the illusions? Evolutionary heritage, healthy relationships may require some of these illusions. May be illusory that we as scholars are seeking truth, even that is possibly just for glory. Key question: why did economics take so long? We understood the nature of stars and the wind on the oceans before we understood basic things about social interactions. The illusions were precious to us. There may be things we don't want to know. Scalping podcast, game sold out, so scalper says; son laughs knowing that scalper had an incentive to deceive. But want siblings to see each other as honorable. Should we overcome all our biases? Paul Graham essay. Look at costs and benefits. Ancient situations like parent/child, spouses, are more likely to have ancient evolved senses of what to do. World policy, global warming, future of robots, basic nature of government are pretty far from ancient intuitions so we need some people to come to grips with the truth about them. Evolved intuitions are the least likely to be about right there. Create betting markets on important markets. |
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| 0:36 | Intro. Russ was taught as grad student in 1970s that the Federal Reserve (the "Fed") controls the money supply via open market operations; but what we hear of late is that they control interest rates. They control one interest rate, the Federal Funds rate--the rate at which banks sell their reserves to each other. Fed sets that interest rate so as to maintain reasonable levels of employment and prices. Is it a posted rate or do they use open market operations? In principle they could set it, but in practice they use open market operations to make it binding. Friedman podcast: they claim they are manipulating the interest rate but in actuality they are controlling the money supply. They think of themselves as controlling the interest rate and take daily open market operations to maintain the interest rate. In the 1970s they set for themselves a level of reserve growth that they wanted to maintain but they didn't do it. What's schizophrenic about this: taught that money supply is key component for inflation, but man on the street believes that it's the interest rate. If the economy is growing too quickly, the Fed raises interest rates; if the economy is growing too slowly, the Fed cuts interest rates to "stimulate the economy." That certainly is the way the Fed thinks about it, and man on the street accords with what they say they are doing. A better way to think about the problem is that the Fed puts out money, which changes the amount of real money balances. If people have more money balances than they want to hold they spend them on goods and assets and vice versa. It's a better way to think about it, but it's not the way journalists write about it. Ben Bernanke, Chairman of the Fed, knows both of those stories. You can't talk about interest rates in the plural--the Fed only controls one interest rate. Argument seems absurd, so why does Bernanke talk about it that way? Senators: You talk to me about money supply but my constituents are interested in interest rates. Historically true. Very few occasions since the 1930s that the Fed actually practiced independence--only Volker era. Bernanke is being leaned on by the Congress and accedes to them; expands economy trying to respond to the short-term pressures instead of how do we get a balanced growth path with low inflation and low unemployment. That brings him to the interest rate. Holders of mortgage bonds: if he lowers interest rates they will have smaller losses. They are on his back to cut the interest rate he controls hoping that the rates they worry about will also come down. Fed on paper is independent but it has incentives to respond to political pressures. In reading the minutes of the Fed it has always responded to Congress. Volker had the help of the public because by the end of the 1970s the public wanted to reduce inflation. By summer of 1982, even he eased up. |
| 10:50 | Even Supreme Court responds to political pressures. Fed's power is delegated, Congress could change it. Wouldn't be easy for Congress to change it, so it hangs on to a measure of independence. Other incentives: no Chair of the Fed wants to be perceived as causing a recession, whether it is the fault of the Fed or not, or for a recession to occur on the watch of a Fed Chair because it will be put at his feet. Cutting the interest rate--expansionary monetary policy--with a goal of making the economy keep growing, runs the risk of a steep increase in the rate of inflation which will surely increase nominal interest rates that he does not control, which in turn affects the economy. As inflation rises, lenders want a premium for what they are lending because it will not be worth as much when they get it back. It depends on the Fed's ability to forecast what's going to happen. Economists are not very good at that kind of forecasting, the pressures from Congressman, Wall Street, and the Administration are pushing the Fed to focus on these short-term movements. May be in a recession but not a depression; the economy is not in that kind of trouble. Latest data show that the economy is holding up very well. What the Fed can do is focus over the longer term; but it doesn't want to do that because of the pressures. Discussions at the Meetings over the last 25 years is mostly over what's happening now, only short term consequences, not long term consequences. Recently, some improvement: two voting members have publically dissented; four or five do not like the current policy. Only 4 banks out of 12 asked for the recent reduction in the interest rate, so directors and managers of those banks were not happy with the reduction of the interest rate. |
| 16:22 | History of the Federal Reserve, Vol. I is out, U. of Chicago Press; Vol. II later this year. Open Market Committee minutes. Since 1913, the Fed has some degree of independence but responds to political forces. But the Fed's performance in the last 30 years is much superior to its performance in its early days, volatility of prices, inflation, money supply. What's different today? From 1985-2001 the Fed followed an intermediate term strategy instead of attending to the short run movements of unemployment under Paul Volker. Having gotten inflation down to 3 or 4% he looked ahead at a longer term; followed by Greenspan. The Great Moderation. Now back to focusing on short term, thinking you could focus on interest rates forgetting about inflation. But that was the mistake made in the early 1970s. Look at real GDP over the last century. First 50 years are more volatile than the last 50 years. Less severe recessions, even starting before Volker. Random or due to explicit Fed policies improving? Until about 1930 we were on the Gold Standard. Fisher, Keynes, Marshall: you had to conduct a pro-cyclical policy: when gold flowed in, economy had to expand; when it flowed out economy had to contract. People thought they could do better at managing unemployment. Under gold standard, we were a heavily agricultural nation. Now we much more dependent on employment. Since the 1950s, Martin era (head of the Fed for 19 years), generally stable policy, very good in the 1950s. During that period, President Eisenhower, very much against fiscal deficits, wanted a balanced budget; therefore the Fed was not under pressure to finance debt. Under Kennedy okay; under Johnson, Great Society, Vietnam War expanded, deficit increased, and under Martin the Fed financed it. |
| 23:25 | What do you mean by the Fed financed the debt? Cause of something is only the proximate cause, have to look deeper. Federal Government was expanding welfare programs, didn't want to raise tax rates, borrowed to finance it. Johnson was a strict believer that high interest rates were bad. Pressured Martin, who operated under a view that we should coordinate policy. If government ran a deficit, Fed would not raise interest rates. Though Martin didn't fully believe in that view he responded to the pressures. In 1965 he begged Johnson to increase tax rates, but Johnson couldn't get the tax rate increase through till 1968 surtax. Keynesians first screamed that they wanted an increase in tax rates but as soon as it passed they started to scream overkill, it would hurt the economy, we're going to have a recession; Martin gave in. At the time, in the 1960s, less integrated world capital markets, so if U.S. borrowed more, it would force interest rates up to ensure that the bonds could be sold. That would spill over into other sectors discouraging other activity. The Fed expanded the money supply enough to hold interest rates down so that the Federal Government could do the borrowing. Period of moderate to low inflation initially. Then came the Great Society. Fed financed that. Martin, committed to fixed exchange rate, Bretton Woods system tottering and 6% inflation in U.S. Indirectly the spending of the Johnson administration led to inflation. Aimed for unemployment not above 4%; and coordinated policy; those two things led to the inflation. Once we had it we had to suffer some pain to get rid of it. Nixon; Ford; Carter not very good till very end when public claimed inflation was the number one problem, hired Volker. Carter solution was that the way we were going to control inflation was through the mistaken idea of having guideposts and guidelines were supposed to tell industry how to set prices; mistake. |
| 30:14 | Not so much the wisdom of the particular Chair of the Fed or advances in understanding monetary policy or economic theory but rather understanding of the public, Congress, and President that pressures the Fed. We do learn and research does matter. Around the world there are many countries that have inflation targets: controls inflation and we understand, from Friedman, that it takes a couple of years till today's policy gets translated into inflation. Longer run focus results. U.S. doesn't do this, though. Taylor Rule (John Taylor): concentrate on both the loss of output and the rate of inflation; work on both all the time, don't keep shifting from one to the other; pretty well accepted in many countries. Fed looks at it but doesn't do it. But Fed's only got one instrument, one lever--it can't control both at once. But it can pay attention to both at once and moderate its policy so it doesn't expand too much to hold down the policy of a recession and then think it's going to reverse that and hold down inflation. Taylor Rule says: Think about the medium term, aim for both. |
| 33:41 | Inflation generally and its impact on our standard of living. Fed is viewed by as degrading the value of the dollar; but if there were steady low inflation economic actors would respond to that and would expect it and Fed would be relatively harmless. Real risk is uncertainty, swings in inflation, unpredictability of it. Bubble in housing in part because Fed made it very profitable to borrow. Now we are again holding the interest rate way below where it should be to balance the risks of inflation and unemployment. Since the late 1970s inflation has been kept in a narrow band; but it is difficult for the Fed to keep that course, unlikely that they will. Would we be better off with an alternative to the Fed? During the great inflation of the 1970s, people expended a lot of energy figuring out how much to invest and how, real costs; and we wiped out the Savings and Loan industry, massive losses, $200 billion paid by taxpayer. Housing is a sacred cow in every Congressional district. Couldn't allow the interest rates at S&Ls to rise; ended up cheating the public, who couldn't receive market interest rates. Market created the money market mutual fund, offering honest interest rates, but drained money out of the S&Ls; finally repealed the holding of interest rates too low at S&Ls. Is there an alternative to the Fed? Want to get away from the day-to-day emphasis. We haven't convinced the economics profession, let alone the general public. Inflation target would drive us toward a medium strategy. |
| 40:24 | Should we go back to a gold standard? Virtue in the gold standard: you can only have a moderate amount of price instability. But we'd have to tolerate bigger fluctuations in employment and output. Also, other countries would have to do it simultaneously. In theory, would we grow faster under a gold standard--wouldn't people be able to focus on the real variables without worrying about price instability? Yes, but output variability would be larger. In 1913, was it claimed that employment swings would be more moderate? No. Gold standard at that time was just accepted. Discussion about the Fed in 1913 was very little about economics. Mostly about who would control the Fed. Wilson, others in Congress, set up board in Washington to supervise the system; regional banks run like businesses; set off internal argument about who would run that system. Regional banks did, till Great Depression. After that, authority transferred to Washington. Some who are worried about the Fed and the dollar argue that under a gold standard the dollar would have a real value; now it's just a house of cards. Price level did stay stable over the long term, though not year to year, under a gold standard. Easier to predict prices for retirement. We've lost that advantage; can't provide same long-term certainty. But we've gained greater control over the medium and short term, which we claim that we want. Historically under the gold standard we were an agricultural nation. Any small loss of income today seems to be a greater disaster. Risk of going back to a gold standard: deflation. Average level of prices would be falling as output grew. Irving Fisher: have to tie the price of gold to a basket of commodities. Why would mild deflation be worrisome? Might not be. Seven periods when prices fell. Can't see a difference in recoveries from recessions during mild deflation than mild inflation--exception was the Great Depression. Expectation was that inflation would continue and continue--till we devalued the dollar. By the end of WWII we had about 70% of the world's gold stock. Fed made another mistake, 1958 recession, decided to sterilize, stop buying gold. Friedman emphasized increases in reserve requirements. |
| 50:20 | Stimulus checks just went out from Washington, idea being that if consumers have more money in their pocket they will spend it and stimulate the economy. Very Keynesian idea. Permanent income theory: temporary changes in tax rates or government, people will save it. What is the meaning of a tax cut without a spending cut? Carter, $50 rebate, canceled. Bush, temporary payment coupled with a permanent tax cut. Most people save it or pay down debt. China. On the supply side of the economy: What is the difference between government printing money, put in mailboxes, please go out and spend it; versus government announces they are cutting taxes? Wouldn't they have virtually the same impact? If in equilibrium before, in the first case, I now have more money, more cash balances, so I will spend it down. If it's known to be temporary won't businesses just raise their prices? Not immediately. Output would expend temporarily. Tax rebate story: government has now accumulated more debt, which doesn't happen in the money-printing story. People know they have to pay that some day, so they save it all. Fiscal stimulus will not have even a temporary effect because nothing has changed as far as your wealth is concerned. (You have to pay the finance in future taxes some day.) A tax cut that is not accompanied by a spending cut, or a tax cut in rates that is accompanied in spending increases, is really a tax increase. If we don't cut spending all we've done is create more debt, which we have to service via a future tax increase. Misleading statement by Dick Cheney to Paul O'Neill: Reagan showed that "deficits don't matter." He should have added: only if foreigners buy the debt. Even then we owe that money and some of that charge is now coming home in the form of the depreciation of the dollar. Standardly we claim the reason we don't want to run deficits is because it will raise interest rates and slow down the economy, but it has not done that. If foreigners hold the debt the interest rate stays stable. Mercantilist, only works as long as they are willing to take th |