EconTalk http://www.econtalk.org/ Copyright 2013 Mon, 20 May 2013 06:30:00 -0500 http://www.movabletype.org/?v=4.21-en http://blogs.law.harvard.edu/tech/rss Epstein on the Constitution Richard Epstein of New York University and Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the U.S. Constitution. Topics covered in this wide-ranging conversation include how the interpretation of the Constitution has changed over time, the relationship between state and federal power, judicial activism, the increasing importance of administrative agencies' regulatory power, and political influences on the Supreme Court.

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0:33Intro. [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.
6:03Russ: 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.
10:10Guest: 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.
14:12Russ: 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.
16:41Russ: 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.
21:12Russ: 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.
27:51Russ: 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.
35:20Russ: 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.
41:02Russ: 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.
47:30Russ: 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.
52:35Russ: 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.
58:07Russ: 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.
]]> (21 COMMENTS) Posted by Russell Roberts at http://www.econtalk.org/archives/2013/05/epstein_on_the_1.html. http://www.econtalk.org/archives/2013/05/epstein_on_the_1.html http://www.econtalk.org/archives/2013/05/epstein_on_the_1.html Richard Epstein Mon, 20 May 2013 06:30:00 -0500 Frakt on Medicaid and the Oregon Medicaid Study Austin Frakt of Boston University and blogger at The Incidental Economist talks with EconTalk host Russ Roberts about Medicaid and the recent results released from the Oregon Medicaid study, a randomized experiment that looked at individuals with and without access to Medicaid. Recent released results from that study found no significant impact of Medicaid access on basic health measures such as blood pressure and cholesterol levels, but did find reduced financial stress and better mental health. Frakt gives his interpretation of those results and the implications for the Affordable Care Act. The conversation closes with a discussion of the reliability of empirical work in general and how it might or might not affect our positions on social and economic policy.

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0:33Intro. [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.
8:03Russ: 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.
18:10Russ: 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.
24:57Russ: 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.
33:03Russ: 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.
38:20Russ: 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.
43:03Russ: 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.
50:35Russ: 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.
56:27Russ: 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.
1:03:11Russ: 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.
]]> (20 COMMENTS) Posted by Russell Roberts at http://www.econtalk.org/archives/2013/05/frakt_on_medica.html. http://www.econtalk.org/archives/2013/05/frakt_on_medica.html http://www.econtalk.org/archives/2013/05/frakt_on_medica.html Austin Frakt Mon, 13 May 2013 06:30:00 -0500 Bernstein on Communication, Power and the Masters of the Word William Bernstein talks with EconTalk host Russ Roberts about his latest book, Masters of the Word. Bernstein traces the history of language, writing, and communication and its impact on freedom. The discussion begins with the evolution of language and the written word and continues up through radio and the internet. A particular focus of the conversation is how tyrants use information technology to oppress their people but at the same time, technology can be used to liberate people from oppression.

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0:33Intro. [Recording date: April 30, 2013.] Highlights to come later this week--Econlib Ed.
]]> (26 COMMENTS) Posted by Russell Roberts at http://www.econtalk.org/archives/2013/05/bernstein_on_co.html. http://www.econtalk.org/archives/2013/05/bernstein_on_co.html http://www.econtalk.org/archives/2013/05/bernstein_on_co.html William Bernstein Mon, 06 May 2013 06:30:00 -0500 Galbraith on Inequality James Galbraith of the University of Texas and author of Inequality and Instability talks with EconTalk host Russ Roberts about inequality. Galbraith argues that much of the mainstream analysis of inequality in the economics literature is flawed. Galbraith looks at a variety of different measures and ways of analyzing income data. In the podcast he focuses on how much of measured inequality is due to changes in specific counties or industries. Other topics discussed include the state of economics in the aftermath of the Great Recession and the importance of the government safety net and other social legislation.

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0:33Intro. [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.
1:33Russ: 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.
9:32Russ: 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.
12:55Russ: 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.
21:14Russ: 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.
30:16Russ: 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.
34:55Russ: 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.
38:32Russ: 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.
44:36Russ: 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.
51:07Russ: 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.
57:04Russ: 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.
]]> (54 COMMENTS) Posted by Russell Roberts at http://www.econtalk.org/archives/2013/04/galbraith_on_in.html. http://www.econtalk.org/archives/2013/04/galbraith_on_in.html http://www.econtalk.org/archives/2013/04/galbraith_on_in.html James Galbraith Mon, 29 Apr 2013 06:30:00 -0500 Glaeser on Cities Edward Glaeser of Harvard University and author of The Triumph of Cities talks with EconTalk host Russ Roberts about American cities. The conversation begins with a discussion of the history of Detroit over the last century and its current plight. What might be done to improve Detroit's situation? Why are other cities experiencing similar challenges to those facing Detroit? Why are some cities thriving and growing? What policies might help ailing cities and what policies have helped those cities that succeed? The conversation concludes with a discussion of why cities have such potential for growth.

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0:33Intro. [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.
4:25Russ: 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.
13:02Russ: 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.
17:59Russ: 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.
24:42Russ: 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.
30:54Russ: 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.
40:41Russ: 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.
46:38Russ: 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.
52:47Russ: 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.
57:47Russ: 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.
]]> (20 COMMENTS) Posted by Russell Roberts at http://www.econtalk.org/archives/2013/04/glaeser_on_citi.html. http://www.econtalk.org/archives/2013/04/glaeser_on_citi.html http://www.econtalk.org/archives/2013/04/glaeser_on_citi.html Edward Glaeser Mon, 22 Apr 2013 06:30:00 -0500 Sachs on the Crisis, the Recovery, and the Future Jeffrey Sachs of Columbia University and author of The Price of Civilization talks with EconTalk host Russ Roberts about the state of the American economy. Sachs sees the current malaise as a chronic problem rather than a short-term challenge caused by the business cycle. He lists a whole host of issues he thinks policymakers need to deal with including the environment, inequality, and infrastructure. He disagrees with the Keynesian prescriptions for stimulating the economy and believes that the federal government budget deficits are a serious problem. The conversation closes with a discussion of the state of economics.

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0:33Intro. [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.
6:24Russ: 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.
13:24Russ: 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.
22:15Russ: 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.
28:01Russ: 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.
36:41Russ: 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.
45:27Russ: 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.
55:57Guest: 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.
58:03Russ: 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.
1:02:34Russ: 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.
]]> (55 COMMENTS) Posted by Russell Roberts at http://www.econtalk.org/archives/2013/04/sachs_on_the_cr.html. http://www.econtalk.org/archives/2013/04/sachs_on_the_cr.html http://www.econtalk.org/archives/2013/04/sachs_on_the_cr.html Jeffrey Sachs Mon, 15 Apr 2013 06:30:00 -0500