Stiglitz on Inequality

Nobel Laureate Joseph Stiglitz of Columbia University talks with EconTalk host Russ Roberts about the ideas in his recent book, The Price of Inequality. Stiglitz argues that the American economy is dysfunctional, benefitting only those at the very top while the bulk of the workforce sees little or no gain in their standard of living over recent decades. Stiglitz blames this result on deregulation and the political power of the financial sector and others at the top. He wants an increase in regulation and the role of government in the economy and a more transparent Federal Reserve Bank that he blames for coddling the financial sector. The conversation also includes a discussion of the Keynesian multiplier.

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


Joe Cushing
Jul 9 2012 at 9:38am

I don’t have a problem with inequality. Entrepreneurs deserve the rewards they earn, even if luck is a big part of how they earn them. I do have a problem with rent seeking though. I don’t like that so many of our top x% are got there by rent seeking instead of by creating the wealth that they have. Stiglitz overemphasizes private types of rent seeking when government rent seeking is so pervasive.

We need to bring out the term “government failure” as often as people want to bring out the term market failure. While there are some inherent and predictable flaws in the market’s ability to bring about ideal outcomes, there are also inherent and predictable flaws in governments ability to bring about ideal outcomes. Generally speaking, the government is far worse. We are usually better off tolerating a less than ideal market outcome than implementing a government program that will make it worse.

Jul 9 2012 at 9:39am

1. IMHO he addresses the subject in an overly bread manor. I would rather that he take the financial sector and look at it closely to see it is the way that it is.

2. This:

But that is only result as it is because more and more members of the household are working

Seems clearly wrong to me. There may be more members of the household are working in the taxed economy than in the past but I am pretty sure that people are working less today than ever. All those stay at home house wives were working and producing for the families consumption. They were not enjoying leisure all day.

To me this is just one example of why you must look at the overall standard of living including the amount and difficulty of the work the amount and the amount of leisure people take when you look at this subject. I do not think that many people want to return to the type of factory work that they used to do when I was a kid in the 1960s and 1970s, even for more income. The factories where often very hot, at least in the summer time, the work was often very physically hard and mostly mind numbingly boring.

As affluence grows I would expect more people to opt to study less and work less as they can now get by without so much effort. At the same time those who are more strivers and workaholics will work for relative position and for success.

One could ask why is the greater income differential not causing the poor to work and study much harder than the already affluent, who can afford to coast.

Matt Edin
Jul 9 2012 at 10:48am

I find it funny that Stiglitz (and others) cite the NIH as a place where gov’t spends money well (less rent seeking). I agree in part. To the extent that it spends money well is due to inherent competitition. Investigators submit grants to the NIH. These are scored by peer panels for highest impact and value. These days, only about 15% of these get funded. These panels may also decide to fund a higher % but not give out as much money to each. I’m sure some cronyism is involved, but by and large this system works well due to competition. This is an atypical branch of gov’t. These principles are not broadly applied within govt. Certainly not applied when congress makes huge expenditures trying to steer the economy.
If Stiglitz really studied the NIH, he would probably also find a big rich/poor inequality that would disappoint him. Big labs make the biggest gains, and make the most innovative discoveries, and have a large amount of grant money at their disposal.
I disagree with Stiglitz in saying that the median people are no better now than in the mid 90s. The technological and medical advances now available to the median people is significantly higher. From cars to clothing to microwaves and iphones, what we have now is just remarkably higher quality. Much of this improvement came about coincident with the increase in wealth at the top. Hard to separate the two without stifling innovation.

Greg G
Jul 9 2012 at 11:01am

This interview is another example of EconTalk at its best. It is so common today for interviewers to insult and talk over their guests when they disagree with them. You never do that Russ and it makes EconTalk a breath of fresh air. You are very consistent in being generous with your guests and seeking to engage with the strongest arguments of those you disagree with.

A rare exception to that is the fact that you like to cite historical examples of pernicious effects of deficits at full employment as evidence against Keynesianism. Keynes never favored deficits at full employment and I appreciated the fact that Stiglitz called you on that in the discussion of the multiplier effect. This discussion advances your audience’s understanding of these issues and helps to keep us hopeful that such discussions can actually lead somewhere positive.

Brad Hutchings
Jul 9 2012 at 12:33pm

Russ deserves a Nobel Prize for finding common ground. The dog and I walked an extra mile this morning so I could hear an artist at work uninterrupted.

Transparency came up quite a bit, of course. I am a big fan. But I liken it to wires connecting devices on a desk or components in a media center. You can shine all the light you want on them, but if they are a tangled mess, eventually, you have to untangle them. We need a concept for that to work in parallel with transparency.

Jul 9 2012 at 12:43pm

I find it frustrating that he titles his book “The Price of Inequality” when the extreme inequality he is referring to is really a symptom rather than the cause. As he says himself, this inequality is NOT a result of correctly operating capitalist principles.

It’s amazing how much Russ and Stiglitz actually agree upon. And yet Stiglitz still chooses to use this kind of loaded language which misleads the general public, fuels extremist reformer types, and makes finding common ground and mutual understanding so difficult.

Trevor Comeau
Jul 9 2012 at 12:59pm

I’m all for a level playing field but when you try to level the results of the game there is a problem in the making.

What I would like to hear is who (or what) he feels is smart enough to accomplish this effective government stimulus. I cringe every time I hear ‘it would have been worse’ or ‘it just wasn’t done correctly’ or ‘just wasn’t large enough’ when looking with hindsight at the past crisis response.

I work at a software company and no person or half dozen people know all the specifics that go into making the software. Like the economy it is like a ‘living’ organism that has far too many interconnected pieces for anyone to be able to manage at all levels. We (all 500+) do our jobs and roll our feedback up to the appropriate person to get it out the door on time.

Ryan H
Jul 9 2012 at 1:54pm

An instant classic I think.

The things that I appreciate most:

1. A rare treat to have someone from the opposite camp as a guest (I know Russ tries to get more to come on)

2. Two guys from polar opposite camps and they spent a significant amount of time agreeing with each other.

3. A couple instances of minor attempts to both talk at the same time asside, no raised voices and nobody was silenced.

4. Russ graciously (as always) gives his guest the last word.

D Jan
Jul 9 2012 at 3:24pm

I think both Russ and Stiglitz are sometimes guilty of either overemphasizing or brushing over some crucial problems.
This is the best type of interview there is. When two people of very different persuasions discuss their opinions and find some common ground.

I like this a lot more than an interview where you invite someone to confirm your own opinions. Although it’s probably more appealing to go on a show knowing the host is essentially in agreement with you.

I think it’d be very interesting to hear more people that Russ disagrees with a lot on econtalk. I’d like to hear Russ discuss with some really nasty leftists (in comparison to Stiglitz).

Andre Salazar
Jul 9 2012 at 4:17pm

This is an absolutely FANTASTIC interview!!! Now Russ needs to land Krugman. I know I probably won’t learn an immense amount of NEW information from the discussion but I think its probably my most anticipated econtalk and one that Russ would probably not take lightly all things considered.

I have one question, why did Russ not ask him about Stiglitz’s testimony in front of congress specifically saying that digging a whole and filling it up would stimulate the economy?

Jul 9 2012 at 4:55pm

Kudos to Russ, he must have been tempted to push Stiglitz further on his naivete about politics (we just have to get rid of rent-seeking!) and his use of data that is obviously suspect.

Jul 9 2012 at 5:01pm

Remarkable common ground between Russ and Joe, of course with limits (when the discussion turned to Keynesianism, for instance). To oversimplify, both normatively conservative and liberal economists oppose rent-seeking activities, ergo, common ground. Of course, their value-based motivations differ, with libs focusing, as Stiglitz does, on inequality (unfairness, the one percent, and that constellation of concerns), where non-lib economists are more likely to focus on efficiency implications, moral hazard, and the like.

Stiglitz gives lip service to efficiency, but more as a recognition of why there is common ground than as a shared concern — which he reveals himself not to value too highly given some of his fiscal-policy preferences that would plainly distort markets.

To oversimplify further (and I’m sure both Russ and Joe would object), the intellectual common ground evident in this interview is mirrored in intersection of concerns among Tea Party and Occupy adherents who may be acting on more visceral values than those explored here).

It certainly seems as if political opportunities ought to exist to attack rent-seeking given the disdain for such policy outcomes across such a wide portion of the political spectrum. But I suspect such a coalition is impeded not just by mutual suspicion but also by different policy prescriptions embraced by libs and non-libs. (Libs tend to address broken government with more government in the name of “fixing” the flaw; non-libs tend to address it by seekng to eliminate the role for government in the the portion of the economy where current policies are offensive).

Jul 9 2012 at 5:09pm

Russ is indeed a very gracious host, even when he disagrees with his guest. I also found Stiglitz’s style much less off-putting than that of other outspoken Keynesians.

I especially enjoyed the discussion about fiscal stimulus, and agree with Stiglitz that automatic stabilizers are better policy than discretionary project spending. It is notable, however, that even someone of such (reportedly) towering intellect cannot offer more than his opinion about what unemployment would be absent the Recovery Act. Without a valid natural experiment, the debate about fiscal intervention and its effect on unemployment will remain an ideologically-charged dispute.

Richard W. Fulmer
Jul 9 2012 at 5:59pm

I think that at least some inequality comes from supply and demand – there is a dearth of educated people (including welders, pipefitters, and machinists). Hundreds of thousands of jobs are available in this country even now, but there are not enough people with the necessary skills to fill them.

There is a lot of blame to go around:
– Parents who don’t teach their children the value of an education and allow their kids to spend their time watching TV and playing video games.
– El-Hi schools that do not teach their students the basics.
– Teachers Unions that resist competition from private schools and voucher programs.
– Overemphasis of college degrees over vocational education.
– Universities that offer useless degree programs and the students who take them.
– An underclass culture that sees getting an education as “acting white.”

Jul 9 2012 at 6:47pm

As nice as natural experiments may be, they can never alone prove an economic theory. The theory must be based in sound logic to begin with, or the data may be misread.

That’s what bothered me about the discussion of Keynesian policies in this episode. Russ didn’t even try to argue with or ask professor Stiglitz to explain the logic behind his positions, he only quibbled with the interpretation of the data.

Jul 9 2012 at 7:36pm

Stiglitz overemphasizes private types of rent seeking when government rent seeking is so pervasive.

Joe, there’s not a whole lot of rent seeking in government that doesn’t involve a private sector dance partner.

Rent seeking is endemic in the private sector, and only well designed markets prevent this. I think the government has a role to play in regulating and policing well designed markets. But the political problems pointed out by Stiglitz makes it unlikely government as we presently know it will step up to the plate.

Markets are not good by definition, they’re only good by good management. Ultimately the only path forward is to solve this problem.

Jul 9 2012 at 8:42pm

When it comes to income inequality, wages are a price and follow supply and demand.

Low income workers are competing with a fast growing global supply and are becoming less in demand at the same time thanks to automation. Therefore low price.

Meanwhile banking experts who are highly politically connected and therefore good rent-seekers are in high demand and low in supply.

I don’t think it helps to encourage people to buy a home if they are financially challenged because having the tap-root down, inhibits them from seeking better opportunities.

Jul 10 2012 at 3:02am

It was great to hear how much two different ideologies agreed on. The disagreement lies mostly with how to fix the problem. I think such disagreement exists because either a well functioning government or a well functioning market could fix the problem. The problem is that neither will ever exist. Rich people are always going to have the power and they are always going to abuse it. There isn’t much the rest of us can do besides argue over how to fix it I guess.

Jim Feehely
Jul 10 2012 at 3:54am

Hi Russ,

I note that most comments concern Joe’s use of data and are tinged with a degree of anti-Keynsianism. You have obviously developed a strong Hayekian constituency in your audience.

Can I suggest that most commentators are missing the point. While economics debates whether people are ‘better off’, that debate continues to be hide bound by economic models and data. We have, it seems, adopted the delusion that economics explains life. But economics does not even approach explaining human life or society. These things are way too complex for an explanation that is based on self interest, incentives and disincentives.

What Joe is saying is that all those not in the top percentiles are worse off socially. And that degradation seems to be confirmed by the analyses of individual wealth. This is so even if many free market economists cavil with what the ‘wealth data’ says. I recall a recent podcast in which you and your then guest argued that the data on increasing inequality was being contorted to show the increasing gap between the top and the middle was worse than it really is. I commented at that time that the discussion actually confirmed the increasing gap, albeit cavilling with the quantum of that gap. Given that the dogma of globalism and de-regulation has promised, since the 1970s, that more liberal market economics would deliver better growth and equality, to argue that inequality is not as bad as some say admits the lie inherent in that dogma. Why are there so many people prepared to defend a system that has demonstrably failed its citizens with airy ideology and barren economic theory?

For example, I have not seen any economist attempt to deal with the epidemic of depression and loneliness that our economic system has delivered developed society. Surely some swot could at least calculate the social cost of that in the only currency economics deals with – money. But that does not fit the models, does it.

I am reminded of a radio interview with Noam Chomsky when he was here in Australia at the end of 2011. The interviewer from JJJ, the national youth broadcaster, asked Noam why the Occupy movement does not express a coherent message; i.e. a message so simple the popular media can report it in 10 seconds. Noam replied, and I paraphrase, ‘We live is a society ruled by an economic hegemony that promises that we will will become increasing satisfied and happy. That so many people are prepared to so publicly express that they are not happy IS THE POINT of the Occupy movement.’ It went over the interviewer’s head, but it hit the nail on the head for this sceptic.

Having said all that, I whole heartedly agree with you that if we must live under capitalism, then capitalism must be allowed to do its work on the greedy who scam the system. The very grave mistake we have made (more so in the USA than Australia) is to rescue the corporate criminals and punish the middle class and the poor as a consequence. Accordingly, all debate about stimulus etc is hollow when we simply do not know what the true outcome ought to have been if we had taken our medicine in 2008. But given the unmanageable problem of sovereign debt around the world, particularly in Europe and the USA, we are certainly facing another opportunity to medicate capitalism with its own consequences. And the next time there is no capacity to bail out the corporate criminals and greedy fools. We will not be able to afford to execute on the idiocy of ‘tho big to fail’.

Jim Feehely.

Jul 10 2012 at 7:46am

Stiglitz has two faces: here we see a charming and consensual Stiglitz. This is not the Stiglitz I used to read and hear elsewhere. In particular, in the French media as the newspaper “Les Echos”. Stiglitz strongly criticizes everything that is not Keynesian, and blames liberalism and capitalism for all that does not work in Economics with a lot of nonsense and demagoguery. It is seen as an Ayatollah of Keynesianism by French classical liberals, just like Krugman. I think instead that this interview is not very useful in terms of ideas, as the two protagonists do not really reveal themselves.

Keith Beacham
Jul 10 2012 at 8:26am

I largely agree with Stiglitz and I enjoyed this interview. I would remind listeners that Russ has made clear what his biases and priors are and that very often they rest on no less flimsy intellectual underpinnings as his ideological adversaries. His intellectual humility is why I listen every week and is likely what permits him to be gracious to guests with whom he disagrees.

Jul 10 2012 at 10:26am

One point of discussion was the # of gov’t workers. Stiglitz claimed it has gone down by a million.

I see the link to the BLS data has been posted. Perhaps I’m reading it wrong, but it appears that as of June of 2012 the # of gov’t workers was down 612k from the 2009 peak and back to around 2006 levels.

Jul 10 2012 at 11:08am

I concur with the majority of commenters here; this was an excellent discussion, both substantive and courteous. Imagine how much better our republic would be if this were typical of our media’s discourse.

Russ Roberts deserves a great deal of credit for the conversation’s quality. Though I generally disagree with his biases, he always acknowledges those presuppositions explicitly and in the spirit of intellectual humility. He offers meaningful challenges to his guests, but those challenges are delivered respectfully and with a minimum of rhetorical pap. I think he might have pressed Stiglitz a bit more of “statistical quibbling” but perhaps his restraint was wise. And, as always, he gives his guests the final word, a move that goes beyond mere decorum and bespeaks a deeper generosity.

Joseph Stiglitz acquitted himself well enough here, though I wish he’d proven a bit quicker in articulating the social and political costs of inequality. His finest moment, I think, came in his thoughts about measuring the multiplier effect. It is a mistake for anti-Keynesians to bend over backward to reject the notion that, even in theory, government spending could combat unemployment effectively during recessions. Stiglitz’s point–studies that find low multipliers often examine periods of full employment when gov’t spending won’t make a difference–is persuasive. I would prefer a discussion that, rather than contenting itself with casting a shadow on the theoretical validity of the multiplier, focused on what kinds of government spending have, in deep recessions, proven relatively effective in combatting unemployment and what kinds have been, as conservative critics charge, wasteful or otherwise more likely to crowd out investment.

Thanks for the sanity.

Jul 10 2012 at 11:14am

I second the notion that Russ deserves a Nobel prize for finding common ground. What a gracious host.

Timothy Wright
Jul 10 2012 at 12:22pm

I also think it was a great podcast. It was gracious for Russ to give Stiglitz the last word.

I wish there was more discuss on regulation. Does smarter, more effective regulation need to be complex, requiring an army of regulators? Or can it be something simple like a previous post with Anat Admati, just require more capital reserves in Banks like other corporations. I think more complex the regulations are, the more it can be captured by special interests. How much/little regulation would Russ or Stiglitz accept?

My question with stimulus money is how to pay for it. I don’t understand how it pays for itself. We are reaching high levels of debt now. Is there a cost for stimulus? Could it go wrong?


Dallas Weaver
Jul 10 2012 at 12:23pm

Great discussion.

Who is the “median” worker, household, etc. in todays world? Forty years ago a high school graduate was better in math, science and reading that todays graduates and a high percentage actually graduated on time.

Today, we have 30% or so dropouts from high school and at least 30% of the graduates are marginally educated (I know, I have hired some graduates who were uneducated by our education system). That means that the modern “median” worker is probably a poorly educated high school graduate in a world of advanced technology requiring reading comprehension, basic math and ability to rapidly learn. The value of a median worker hasn’t increased and may have decreased.

Meanwhile the rest of the world is now better educated.

Jul 10 2012 at 12:26pm

Did Valerie Ramey’s work not look at multiplier estimates during periods of higher unemployment? Have European countries with higher unemployment show that government spending gets them back on track?

The thing that turned me off about Stiglitz once the stimulus discussion started was his great confidence in his own opinion after saying that his only counterfactual is what he believed would have happened without the stimulus. His passion went up a notch here and signaled to me that he wouldn’t be entirely fair to counter evidence or counter beliefs and his arguments, more or less, boiled down to “Believe me, I’m right.”

I give Russ a lot of credit for consistently framing his side of the debate with “I might be wrong.”

Overall, it seems like Stiglitz’s blind spot is the knowledge problem, especially when it comes to his own.

Jul 10 2012 at 12:40pm

It is always most enlightening when two people of opposing opinions debate. Really great interview. Thank you.

I would really like to see Roberts and Stiglitz argue about smaller subsets of this issue, to tease out where the disagreements lie.

Again, thanks to the both of you.

Scott G
Jul 10 2012 at 2:14pm


Thanks again for the incredible lesson in political and economic communication. If you were professional athlete, sports commentators would be talking about this episode for years afterward – showing highlight reels and reruns. “Remember the Stiglitz Econtalk! That was incredible!”


Jul 10 2012 at 2:59pm

Question about economic mobility – what about Charles Murrays argument that the mobility actually quite perfectly reflects genetic dispositions? That would mean that ‘we’ are not wasting any talent actually, that the clever actually do get to schools and that the ‘mobility’ actually reflects correctly ability of the children..?

Jul 10 2012 at 4:42pm

The return on government investment on technologies was huge….

Doesn’t seem to work everywhere:

Patrick R. Sullivan
Jul 10 2012 at 5:19pm

Rent seeking is endemic in the private sector, and only well designed markets prevent this.

Without something, or someone, powerful enough to hand out privilege (rent) there would be no seeking of it. It would be pointless. If follows that the bigger and more powerful that someone is, the more incentive to seek its favors.

Jul 10 2012 at 7:54pm

Here’s Stiglitz saying the typical male worker has seen a “half century of stagnation.” As Russ said, this just doesn’t seem plausible, and this data needs to be interpreted more carefully.

John Arkwright
Jul 10 2012 at 8:18pm

Russ did what one can when a guest cites effects and will not delve into causes.

I wanted to hear Stiglitz get down to basics, like one hears with a guest like Caplan. Glass-Steagall kept us safe for decades? So explain how, and then explain how the repeal caused this particular crisis–not just how it might have caused a crisis. Everything I have heard indicates that Glass-Steagall would have made it harder for the defunct financial companies to find buyers.

This also brought me back to the Munger “giving away money” podcast. Stiglitz seemed to view rent seeking as a first cause that could be solved by more regulation, not a result of a government which has the power to award rents. Stiglitz wants us to give government more power, but did not explain how we could do that and, at the same time, reduce rent seeking. As a previous poster said, Stiglitz’s invocation that “we’ve done it right, before,” citing NIH, is insufficient because NIH is not the pristine model he claims it to be–and, in addition, NIH is a minuscule fraction of government action.

Eric Falkenstein
Jul 10 2012 at 10:47pm

Stiglitz seemed so reasonable here. He is much more strident in print, and in other venues.

Steve Hemingway
Jul 11 2012 at 6:05am

Superb interview. Congratulations to both participants. If only politicians in power were not blinded by the dazzling power of the financial sector. If you think things are bad in the US, you should look at the situation in the UK where the economy is totally dominated by rent seeking by the financial sector. Unfortunately we don’t really have any effective opposition to this sector apart from a rather anaemic copy of the Occupy movement. As a typical example, some rather modest proposals for reforming banks and splitting out trading activities is not even scheduled to start until 2019!

Jul 11 2012 at 6:53am

People often bemoan the loss of institutions which raise civic discourse. Econtalk is the cure to what ails us. I must echo the strong support on the high quality of this podcast and Mr. Roberts.

One question, of which I don’t have the answer, is what the impact of greater knowledge work rather than manufacturing / agriculture / extractive industries will have on this discussion? As electronic copies of a person’s output such as a book, podcast, software, or design for use with a 3D printer can be so easily copied, the temptation for rent seeking through excessive intellectual property rules and enforcement seems high. Especially as substitution is harder with a unique product or experience.

Thank you to the Liberty Fund and Russ Roberts for creating and maintain this forum.

Joe Cushing
Jul 11 2012 at 8:42am

The example of private rent seeking given in the talk was a CEO using bad corporate governance to get more money than he deserves–more than the market might bear. While I can see this could be a problem with the design of corporations, I said that this problem was over emphasized by Stiglitz specifically because markets can deal with this problem over time. A company with an overpaid CEO wouldn’t do as well as the competition.

The government rent seeking is a true problem because there is no market check on its power. Of course most government rent seeking involves private companies but that’s not what Stiglitz was talking about when he said private rent seeking. Government rent seeking also uses force to keep it going. Any time force is used to take money from one group of people and give it to another, freedom is lost. I’d call that robbery.

andrew fischer lees
Jul 11 2012 at 9:38am

And the problem I have–and I’ll raise this as more of a philosophical question than a particular question about the mess we’re in–I don’t see any really useful way to evaluate those different claims.

Russ, Joe, there is a way.

Romer and Co. made a falsifiable claim about what they thought the unemployment rate would be with the stimulus.

The unemployment rate was higher. They were wrong.

Neither Russ Roberts, Joe Stiglitz, Paul Krugman, Alan Blinder, etc. matched the boldness of the CEA in making a falsifiable claim ex ante.

If you had, you would be able to ascertain who was right and who was wrong.

As you haven’t, all of this ex post talk is basically just wasting our time.

Next time, man up ex ante. Be courage and take a quantitative, falsifiable stand on what you believe in. Then we will be able to ascertain the veracity of your claims.


Lauren (Feinstone) Landsburg
Jul 11 2012 at 10:52am

Andrew Fischer Lees makes a fascinating point, though I might perhaps have stated it less harshly.

Christina Romer’s now-famous overly-optimistic prediction about unemployment while she was Chairman of the Council of Economic Advisers (the CEA), was certainly courageous. And she deserves a lot more credit than she’s gotten for courageously putting on the line an actual numerical prediction. Probably her biggest mistake was to not give a bigger range around her prediction. (Her second biggest mistake was perhaps a naive one of not realizing that she was being treated as a political sacrificial lamb in being asked to make a specific prediction from the CEA rather than from the National Economic Council.)

I have no doubt that Romer’s prediction was premised on the best possible computer models available at the highest levels of government and in accord with the thoughtful academic economists she’d brought in to the CEA to fact-check and offer the best possible support at the time.

I’ve been thinking a lot recently about the matter of making predictions–not only in economic and financial contexts, but also everyday and personal contexts. It takes a lot of courage to make a prediction that both is specific and also can be pinned down or checked after the fact. First: Some people make a lot of predictions as a matter of habit. Sometimes those folks tout their successful predictions and toss aside their many unsuccessful ones. Second: Some make predictions because they are required to by their jobs. That’s probably where Christina Romer was at. She suffered for it both professionally and personally. Them’s the breaks when you take that big of a risk. Finally: Most economists I know make very few predictions. Economists are perhaps more trained than the average person to keep in mind that making predictions is a very risky business. What’s of interest is perhaps the track record of economists who rarely make predictions. My suspicion is that their cautiousness may be rewarded in a higher percentage of correct predictions.

Jul 11 2012 at 11:46am

I thought Stiglitz was a bit rosy-eyed about politics, but at least it tempered Robertsian skepticism, which can come off as rather nihilistic in other podcasts.

One quibble: I don’t think it’s fair to cite the Roemer 8% forecast as a counterfactual when the stimulus spending didn’t hit until about April, and by then the unemployment rate was already 8.9%. Heck, unemployment was 8.3% in February when the bill was signed. Was the stimulus already a “failure?” Anyone still pushing the 8% forecast as a counterfactual is being a nimnod.

The economy was worse than anyone thought, and it was certainly worse than the assumptions that went into the forecast.

George Balella
Jul 11 2012 at 2:03pm

A powerful evidence supported expose on the logic and coherent explanation that the demand side perspective provides to explain the narrative and history of our recent economy, how we arrived here and some REAL solutions to change things. Greta interview.

Jul 11 2012 at 7:29pm


I think you are going off a meme. Dropout rates have been going down for the past 50 yrs. 1960=27% 1970 = 15% 2009 = 8.1%

40yrs ago, I was in 4th grade and I remember that most adults I knew had a much lower understanding of math than I did.

I think a better comparison would be what employers desire out of the median employee. My hunch is that it has increased a lot.

I also remember that almost noone had air conditioning. Going out to eat was reserved for special occasions, like once a year. Long distance phone calls were prohibitive… Most people now have cable and internet. Poor people often even have cell phones. There are so many ways that we are more prosperous than decades ago. Its hard to quantify such benefits, but they demonstrate a prosperity increase that is missing fomr analyses such as Stiglitz’ in my opinion.

Julien Couvreur
Jul 11 2012 at 8:35pm

Great podcast. The focus on agreements about rent-seeking did help.

I wish you could have pushed more on the “how do you know” problem. Stiglitz seemed to acknowledge it (we don’t know the counter-factual), but proceeded to claim that things would have been worse absent stimulus..

Jul 11 2012 at 10:31pm

absolute and relative mobility:

One hopes that succeeding generations would remain as well off or better than their parents; nothing wrong with that. There should also be absolute mobility. Economic growth makes that possible. Policy that inhibits economic growth and initiative makes upward mobility less likely for everyone – downward or no mobility becomes more likely.

Rent-seekers include politicians who distort economic incentives to secure their office – they demonstrate upward mobility as well, even when the economy generally is not seeing growth. As Milton Friedman said, “Is it really true that political self-interest is somehow nobler [sic] than economic self-interest?”

In capitalism, benefits accrue to those who use opportunities in the market.
What Stiglitz seems to refer to as “trickle down” is government subsidizing certain sectors via rent-seeking. In the condition that government has a large place in the market, leveraging government is an opportunity. The solution is not increasing, but reducing the power of government. Limiting government influence limits the ability to use government for rent-seeking.
“Transferring a problem from the market to the government does not eliminate self-interested behavior” (?).

There is no such thing as lack of demand, just lack of ability to purchase because of lack of purchasing power or lack of supply because of market distortions. When government interferes by choosing supply or substituting its own purchasing power, that doesn’t improve the market distortions, it just creates more distortions that are now politically motivated.

What is there to distinguish the government largess Stiglitz refers to as rent-seeking and “trickle down” from the government largess he refers to as “stimulus”?

Moving away from ‘one dollar, one vote’ would involve reducing government influence in the economy. One vote is currently just as good as any other vote. Voting and lobbying are not the same thing. Lobbying takes place after a politician is in office and temporarily insulated from the electorate, and by disguising the influence through bureaucratic machinations of government, the electorate may never see the corruption.

Cognitive capture, or Stockholm syndrome:
Labor movements aren’t known for their transparency or even representation – they represent members (and really just the most senior members) not ‘workers’ who are just citizens. NGOs are just as self-interested as any other organizations. Stiglitz’ apparent goal is to institutionalize class disparity rather than promote economic growth and opportunity.

In America, access to education has been increasing. Academic success may have faltered. There are disputes about why that has happened – culture seems to be the consensus, either or both the social culture and the political/academic culture.

Thanks for the podcast Russ.

Jim Feehely
Jul 12 2012 at 1:05am

To the believers in the sanctity of economic growth:

– How do you reconcile the increasingly obvious limits of a finite world with the demand for constant economic growth?

– Given that the developed world is the major consumer of resource, how are poor and poorly developed nations to succeed in overcoming poverty and inequality?

Jim Feehely

Jul 12 2012 at 9:04am

It would be better if the government stopped helping the Stars pick my pocket. Cable/monopoly/government makes me pay grown men to play a kid’s game. Babe Ruth made 80,000 dollars a year, enough in those days proportionally.
Likewise when the tech entrepreneurs play the Asian salary/environment arbitrage their incentives should be limited.

Most education is after formal schooling. Moving jobs overseas removes part of this education. You need the hands on, not the empty US factory.

Stars productivity and work effort is inversely proportional to their income, considering their effect on the system as a whole.

Greg G
Jul 12 2012 at 12:35pm

You say “There is no such thing as a lack of demand, only a lack of ability to purchase…”

How then do you explain the large number of people holding extraordinarily large amounts of money at zero or lower real interest rates?

Jul 12 2012 at 3:43pm

Greg: I had already submitted the post before I realized I should have included Regime Uncertainty. Thanks.

Jul 12 2012 at 3:48pm

Regime Uncertainty isn’t lack of demand, it is the determination that there is currently too much risk given lack of information about the future.
Poor countries have the most aggregate demand per capita, one would assume, and yet they are still poor.

Jul 12 2012 at 4:04pm

Jim Feehely:
No one says that all nations will be at some developmental parity. International development is just like personal growth – if allowed, the populations of nations will, over time, educate themselves and develop industries. What holds back poor nations is not necesarily lack of natural resources, in fact that is often the primary export of a poor nation. It is lack of the opportunity to use resources – most often a domestic political problem – that renders populations poor.
I love Hernando De Soto’s book on the subject: The Mystery of Capital.

Sorry about the multiple posts.

Greg G
Jul 12 2012 at 4:36pm

There is always a lack of information about the future. Few if any major turns in the economy have ever been predicted by a consensus of economists.

Are you claiming that Regime Uncertainty is the cause of a lack of demand or merely that you can assert a feeling of uncertainty anytime you want to save the theory that there is no lack of demand?

You seem to be redefining “lack of demand” as “lack of desire for more stuff.” Most people in the economic debate are defining lack of demand as an unwillingness of people who could (and normally would) buy more stuff, to do so.

joe taraborrelli
Jul 12 2012 at 5:18pm

This episode will be required listening for my high school students. I want them to hear what a civil, thoughtful discussion sounds like. Thanks!

Ted Trost
Jul 13 2012 at 1:59am

I’ve wondered a long time if Joe Stiglitz would ever be a guest on the podcast. I would pay for more of this kind of discourse.

What would be great for the podcast is a Keynesian Mike Munger — a regular who leans pro-government intervention to develop a sort of running conversation.

Jul 13 2012 at 4:06am

Joe Stiglitz outlined the National Science Foundation (NSF), and the National Institute of Health (NIH) as examples where there is little rent seeking. Two thoughts; I am not an American citizen so not very familiar with the ins and outs of these organisations, but one obvious thing (which I could be mistaken about it) is they are not typical profit motivated industries, like say banking or automobiles. Secondly, checkout this recent article by Slate showing some damning evidence of the pharmaceutical industries influence over the NIH (together with the DFA):

Joe Cushing
Jul 13 2012 at 1:55pm

Jim Feehely

“How do you reconcile the increasingly obvious limits of a finite world with the demand for constant economic growth?”

There was a time when sending data over a wire required copper. Copper is a very limited resource. This is why people steal it out of foreclosed homes. Today data is sent over wires made out of sand. Sure sand is a finite resource but do you think we will ever use it all up? The resources of this planet are as if infinite. It’s just up to us to figure out how to use them.

Jul 13 2012 at 2:42pm

Great episode. It’s always good to hear differing views.

Russ Roberts
Jul 13 2012 at 4:09pm

Greg G,

Glad you enjoyed the podcast.

I don’t think I cited “historical examples of pernicious effects of deficits at full employment.” Nor did I claim that the multiplier is small. I claimed that the estimates of its size are quite imprecise. Stiglitz’s response implied that the small numbers in the range that is estimated are caused by estimation during times of relatively full employment.

This note by Valerie Ramey finds little difference in measured multipliers between times of high unemployment and low unemployment. I find that surprising. But it may be true. I’m sure this is an issue that will receive a lot of empirical attention over the next few years.

Jul 14 2012 at 2:33pm


I’m not making a theoretical hedge, just noting that in a time of persistent recession and unemployment, with skyrocketing government spending and debt, and the prospect of regulations that may require a complete reworking of business financial prospects vs lay-offs, there is a tendency to reconsider and put-off business decisions until more information is available, despite the interest rates.

Regime uncertainty is not about everyday market risk, it is uncertainty about public policy rules-of-the-game.

Jul 14 2012 at 4:48pm

It can’t be said enough that this discussion was well done, and did not devolve into petty arguing over small points, even though this is often where the substance of a disagreement lies. There was some obvious baiting going on, but I think Russ kept things under control masterfully.

I’d like to visit a major philosophical point Stiglitz made, because I think it ignores half the problem it identifies. Stiglitz said that income inequality breeds rent-seeking/political influence. This political inequality is then used to generate more income inequality, and the cycle continues from there. Stiglitz’ solution is to address income inequality (possibly through redistribution, or automatic stabilizers that kick in against the well-to-do). The problem is that he then assumes this will take care of the rest of the cycle.

Really? Let’s assume the problem of income inequality were eliminated (through whatever mechanism) completely. Experience dictates that more income inequality would immediately begin to fester – driven by political rent-seeking, creation of barriers to entry, etc. And since it’s the political system that creates the automatic stabilizers, they would most easily be circumvented (using lofty rhetoric about how “this industry is different!”) through the political process. Thus, treating one part of the problem and expecting the other part to take care of itself is at least naive.

But where I think many in this comments section disagree most with Stiglitz’ approach is that his proposed solution to eliminate inequality is to engage in the same activities (regulation) that helped produce the inequality in the first place! (It’s like he’s saying, “Here’s the cycle the produces inequality, let’s use part of that cycle to fix inequality.”) But it would be a triumph of optimism over experience to expect that real-world institutions with the most power and the most to lose/gain would bow out during discussion of these regulations, especially since they never have in the past. Indeed, they are very experienced at playing this game. (“So we need regulations telling them they can’t influence regulations!” Again, where will the rent-seekers be when that law is being written?)

I suspect that if Stiglitz got his way, in his exuberance he would get played by these corporations. He would wonder at first why his regulations were so easy to get through, but realize years later that the only institutions this new regulatory structure hit are small, new entrants into the market.

I want less corruption in the system, as I’m sure Stiglitz does. But I reject a system that doesn’t start to manifest its benefits until it’s perfectly executed. That goes for the free market, as well.

Jul 16 2012 at 6:23am

Also Russ is you’re reading this, I just wanted to applaud you for your patience and non-confrontational approach to Stiglitz despite obviously disagreeing. I found it so comical how Stiglitz was incapable of answering (and probably even thinking) about the deeper philosophical issue regarding science in economic predictions, ex-ante vs ex-post, correlation vs causation, etc. Russ you tried as hard as you could but Stiglitz just seemed incapable of appreciating the deeper point you were trying to make, instead defaulting back to his very narrowly defined world view of his opinions and projections.

Noah Carl
Jul 16 2012 at 8:53am

Agree whole-heartedly with the general consensus–an excellent and insightful discussion. Thanks a lot Russ!

Jul 16 2012 at 12:01pm

Ditto to the other comments praising your hosting abilities. A few short points:

-More guests who disagree, please! (I know you try, I just want to emphasize how great this is.)

-I’d love to hear this in an even longer form. Follow-up podcast perhaps? Back and forth blogging?

I want to see you take him to task on stimulus effects, and don’t let him just blow on past your points and shrug them off as “statistical quibbling”. An hour is sometimes just too darn short for deep discussion!

Jul 16 2012 at 1:15pm

I haven’t read Mr. Stiglitz’ The Price of Inequality, and I doubt that I ever will. But I wonder if his analysis of income inequality takes into account any of personal choice or cultural influences that are commonly referenced by conservative thinkers in this realm (Arthur Brooks, Thomas Sowell, etc). This recent article in NYT points out the huge income differential in single moms vs intact families, for one example.

Russ, ‘ditto’ on the high kudos for this interview, and so many others. Love this podcast!

Jul 17 2012 at 10:42am

The Stiglitz interview said that divergence of inequality of incomes leads to lower educational mobility. But there is an undiscussed cost side which is much more informative. Education costs have increased by 2-2.5 times the inflation rate.

While both parties are professors, it seems they would have special insight into why this has happened and could share that with us. I note with interest that whatever the cause, disruptive internet technologies may force change on the higher educational system. Here is a recent article discussing this.

Perhaps a future interview could discuss these issues more fully. This is my favorite podcast.

Jul 18 2012 at 5:30am!

I note Stiglitz repeatedly mentioned his book and the word transparency peppered with repeated claims as to accuracy of his forecasts. I don’t recall a single admission of error (let’s be transparent Joe) of which a casual search on Google can reveal countless examples.

In science, you wouldn’t listen to someone who’s claims are continually refuted.

Just watch how confident Stiglitz is in the attached video, in 2010… and how terribly wrong he has been.

Giles Farnaby
Jul 18 2012 at 6:46am

[Comment removed pending confirmation of email address and for rudeness. Email the to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.–Econlib Ed.]

Jul 19 2012 at 9:15pm

I wouldn’t say that FDICIA was not “invoked.” In fact the FDICIA systemic risk clause (section 141) was explicitly invoked in order to provide bailouts that benefited shareholders. FDICIA worked the way it was designed: there is a reasonably high hurdle to providing a bailout (requiring sign off from the Treasury, Fed, and FDIC).

You may disagree with the design of FDICIA, but it was followed as written.

A. John
Jul 20 2012 at 7:38pm

Another amazing EconTalk! I noticed J. Stiglitz’s new book in one of The Economists and was interested in what he had to say. Further, it was great to see EconTalk hosting J. Stiglitz for a discussion. Thanks for an awesome interview and for another informative and constructive EconTalk!

Brian Gundlach
Jul 23 2012 at 7:09pm

Thanks for this interview Russ! I only recently began a self study of economics and I consider you one of my teachers. Hearing views from your guest that run contrary to my own beliefs was stimulating.

Jul 26 2012 at 4:17pm

Very, very good. One of your best. Thank you.

About this week's guest: About ideas and people mentioned in this podcast:

Podcast Episode Highlights
0:36Intro. [Recording date: June 18, 2012.] Russ: Nobel Prize in 2001; latest book is The Price of Inequality: How Today's Divided Society Endangers Our Future. You paint a pretty bleak picture of the state of our economy, our economic system, and our political system, and I hope we'll have a chance to talk about all three of those. Let's start with inequality. Why is it so disturbing, how big is it, and why is it getting worse? Guest: Well, the United States has distinguished itself as having the highest level of inequality of any of the advanced countries. But even perhaps more disturbing is that it has become the country with the least equality of opportunity. And what that means is the chances of somebody going from the bottom to the middle, bottom to the top, or the top down, are lower than in any of the other advanced countries. An implication of that of course is that a child's life prospects are more dependent on the income and education of his parents than in any of the other advanced countries. This is actually disturbing for at least two reasons, and this is the general theme of the book. One is that it means that we are not using our most valuable resource, the talents of our young people, as well as we should. If you are young and you are unfortunate enough to be born of a parent who doesn't have a good income, the chances are that you won't be able to get the education that would lead you to live up to your potential. The second reason why it's so disturbing is that it's part of our national self-identity that we are the land of opportunity, land of equality. And of course we all know examples of people who have made it from the bottom to the top, immigrants have made it. But what is relevant is not these few examples but what happens on average. And on average we are not doing very well. And so even our sense of identity is being undermined by what's happening in the United States today. Russ: Now, you make an important distinction there in that overview between what we might call absolute mobility and relative mobility. It is difficult in the United States--not impossible--but let's say it this way: My children have a very good economic future probably ahead of them because of the house they grew up in and the education that they are getting. And so they are going to stay, my guess--I don't know--but they have a good chance of staying in the top quintile, which is where they are now, where I am now. And I think that's true of a lot of well-educated people in professional jobs. Their kids have certain advantages from being there. To me, the fundamental question is whether people in let's say the bottom 4/5ths, or the bottom 99% at the extreme, can get ahead. Now, ahead can mean ahead of others, or it can just mean improving. And you paint an even bleaker picture than this picture of relative mobility. You argue that it's not just that they are not getting ahead of others. They're not getting ahead at all. Guest: That's right. The statistics that look at how well people, what's happening to the median, people in the middle, are pretty bleak. Median household income in the United States is down to a level below 1997, a decade and a half ago. But that is only result as it is because more and more members of the household are working. The other statistic that I find just very, very depressing is the income of a full-time male worker today is comparable to what it was in 1968, more than four decades ago. Russ: That's hard to believe. Guest: And if you look at particular groups like those who don't finish college, and an increasingly large fraction of Americans are not finishing college, their prospects look even bleaker. Their incomes are actually going down significantly. Russ: It's true that more Americans are attending college, but not so many are finishing. But I find that 1968 number a little hard to believe. Let me make some obvious challenges to it, some of which you refer to in the book. But I want to hear your thoughts. First of all, you and I, I think, were both alive in 1968. I remember what 1968 roughly looked like, and this looks a lot better. And it's not just because I hang out in a rich city or hang out with rich people. The average American appears to have a much better life--the average male--than in 1968. So you start to wonder whether the data you look at or that others look at are accurate. Do they include fringe benefits? Is the measure of inflation measured correctly? Is the median distorted by demographic changes and other effects? Family size is an example of one problem. When you correct for those things, the median doesn't look so bad; the Congressional Budget Office's (CBO) median income data has risen steadily since the late 1970s; it's not as dramatic as the overall average, but you wouldn't expect it to be. What do you think of those challenges? Guest: I try to discuss those challenges in my book. Most of them are what I call statistical quibbling. In the end, what you can say clearly unambiguously is that the middle has not seen an increase in its income. What you see more particularly is--because there is measurement errors, the problems are pervasive--that the problem is an increasing gap between the top and the middle, and that the middle has been stagnating, the top has been doing very well. And you see it in all kinds of other statistics of stress, of how people are spending their time. So, I actually think that--I don't want to go to the wall and say that these numbers--no set of numbers captures precisely what is going on and anything as complex as somebody's life. But what is clear is that things are not going well for the typical middle class person. Russ: That's certainly true right now. And certainly the last few years have been hard on lots of folks.
8:24Guest: There was a thing that came out, by the way, last week by the Federal Reserve on what's happened to median wealth. Median wealth is a number that has some advantages over income as a measure because it isn't subjected to the year-to-year fluctuations that income is subjected to. Median wealth is back to the level of the early 1990s, whereas if median wealth in the United States had kept pace with the overall growth of wealth, you would have seen median wealth increase by 75%. So, median wealth, you might say, wasn't terrible; if you are a defender of the status quo in 1992, what do they have to complain about? It's not gotten worse than it was, in 20 years. But we like to think of ourselves as having progress, and to say that the typical family now is nowhere better off than he was 20 years ago--wow! The top, the rest of the economy, has done enormously well, is a story of a country becoming increasingly divided. Russ: Yeah. Of course a lot of that wealth data from the Federal Reserve--that's a very messy data set, by the way. I've looked at it in a little bit of detail. But a lot of that of course is housing wealth, and as housing prices rose dramatically through the late 1990s and early 2000s measured wealth went up a lot; it was on paper; and now it's back down. I presume it will come back a little bit, but it is discouraging. And I think your point about the upper 1% or the upper levels is the one we ought to at least focus on for a minute. When you have lots of opportunity as an economy for entrepreneurship, as the United States still does, I believe--I think the venture capital side of our economy is one of the healthier parts, and it's certainly the only healthy part of our financial system. Guest: It's a very small part of our economy. Russ: Yes. Guest: If you look at the numbers. Russ: It is, but if you look at the numbers, it drives a lot of innovation that affects us day to day. That part has done quite well. And I guess the question is: Would you make a distinction? Let me say it a different way. When you have innovation going on in an economy, you are always going to have people who are large winners. And that's going to make the top 1% look very healthy. It's not the same people, the top 1%. Lebron James is in it now; he wasn't in it in 1992; he was very poor. Sergei Brin was a humble graduate student; then he founded Google. The same is true of Mark Zuckerberg, a humble undergrad--maybe not so humble, but in terms of lifestyle, not ego. You are going to see in a healthy dynamic economy--and I would argue probably the most innovative economy in the world--you are going to see large winners emerge. Those emerge for two reasons, one of which is they are really good at making a lot of people happy. That would be Lebron James and Sergei Brin and others who entertain us and educate us and divert us. Then there are some people that you describe as doing rent seeking--they are taking money from the rest of us using the power of government. A lot of those are in the financial sector, and those I would say are bad ways that the top gets wealthy. Would you make a distinction between those two? Guest: Yes, I would. And my concern is that disproportionately a very large fraction of those people at the top are in the second category--rent seekers. That's precisely the point. If we had an economy system that had just the wealth creators, I think there wouldn't be this kind of attitude that there is today. The problem is that those in the financial sector who make so much money by predatory lending, abusive credit card practices, monopoly--some of the monopolists may have regionally made an important contribution, but then they used their monopoly power to leverage their original contribution to get outsized, take advantage of others. That again distorts the economy. If you look at the Chief Executive Officers (CEOs) who take advantage of deficient rules on corporate governance to take a larger and larger share of the corporate revenues, these are all rent seeking activities. And I think that Americans haven't realized the extent to which rent seeking has become pervasive, and the fraction of those at the top who derive significant portions of their wealth from rent seeking. Russ: And of course there are the spillovers that occur from that. I often console myself--in a not-so-attractive way--with the fact that the large size of my salary is not merely due to my cleverness and brilliance as a teacher and an economist. O, that it were so! It's partly due to the fact that there has been an increase in the demand for economists by the financial sector, which has helped my salary indirectly. So, those subsidies help me. It also of course happens in other areas. Doctors are a large part of the 1%. They are beneficiaries of health care subsidies. As you point out in the book, lawyers are a large part of the 1%. They write many of the laws, and strangely enough, they benefit from them. Guest: That's the whole idea. Trickle-down economics, through the top everybody benefits. It's a very inefficient way of running a society. And in the end, trickle down economics has not worked for our or for any other society. If trickle down economics really worked, then the people in the middle would be doing really well because they draw [?] so much money from the top. But the fact is that while the top is doing very well, those in the middle are not. Median income today adjusted for inflation is the same as it was in--is below--1997. So, it seems to me--and this is really one of the major themes of the book The Price of Inequality, we pay a very high price for this inefficient way of running our society. We would do a lot better if we add a set of rules, regulations, taxes, that did not encourage rent seeking.
15:36Russ: I couldn't agree with you more. I think where we disagree--we'll get to this later--is how to get there from here. You seem to see this as a fairly pervasive problem. It goes way beyond the financial sector when you talk about this. And I see it in pockets around the economy. I see the agricultural sector as being an enormous rent seeking part of the economy that's coddled by the government. The auto sector is now becoming part of that. But I see large parts that aren't that way. The retail sector is pretty competitive. The innovation sector, the technology sector--these all seem to me--there are issues about patents that you raise in the book; I think that's a good issue--but overall there is a lot of innovation and competition going on in those sectors. Do you see this as a more pervasive problem for the economy as a whole, or do you see it as a more localized problem? Guest: Well, when you go down the various sectors of our economy, we have a few very dynamic sectors, a few very successful sectors. The high tech sector. But we also have a very large number of sectors that are dominated by rent seeking and an increasingly large, over recent years, fraction of our economy. And it is intertwined with almost, with every other sector. So, we talk about the financial sectors--the corporate governance which gives the scope for CEOs to take an outsized share of corporate revenues--that's something that occurs in a very large fraction of American enterprise where there is insufficient, as I say--they take advantage of these deficiencies in corporate governance. You mention agriculture. I would also mention the energy sector, the health insurance sector. Russ: Yep. Guest: There are lots of--when you look down at the micro, local level, there turns out to be small rent seeking at the local level, but writ large can add up to a significant amount. So, it's very hard to quantify what is the overall fraction of rent seeking in the economy, but I am absolutely convinced that it represents a significant fraction and is significantly distorting our economy. Russ: Yeah. Well, I agree with that. But I think where we differ is you see it as growing out of a deregulation, laissez faire philosophy. And I see of course the exact opposite. I see the size of government growing dramatically in a number of sectors--education, health, agriculture. Even the financial sector, although there's been some deregulation, there's also been increased intervention. It's not regulation, but intervention by government to reduce the natural feedback loops that should make that sector more competitive and more of a profit-and-loss system where people bear costs for their mistakes. Do you see any problems with that relationship, that as government has gotten bigger people are trying to spend more and more time to steer it towards themselves? Guest: Well, obviously, rent seeking through government is a problem, and I won't deny that. I mean, obviously, there's a lot of rent seeking in defense contractors, a lot of rent seeking we've talked about in agriculture. But it doesn't have to be. There are some parts of government spending where there is actually little rent seeking, done extraordinarily efficiently. I'm thinking of the National Science Foundation (NSF), the National Institute of Health (NIH). So it's not an inherent property of government that there is this kind of rent seeking. What is inevitable though is that government is going to set the rules of the game. And what disturbs me, is, as a result of our politics, that the rules of the game are being set in ways that indirectly distort our economy and create inequality. Our bankruptcy law is an example. Financial deregulation is an example. So the new economy can go without rules of the game--and you have to have rules of the game--the question is: What are those rules of the game? And how are those rules of the game chosen? So, what is so disturbing is that the rules of the game in the United States are chosen in ways that do not necessarily lead to a more efficient economy, but which do lead to more inequality. Russ: I couldn't agree with your more. But for example, you complain in the book, and I agree with you, that Dodd-Frank has been a very disappointing financial reform. But it's not surprising that it's a disappointing financial reform. The clamor for reform came from everyday people who were upset with what happened--reasonably so. But the people who spent the most time in the halls of Congress had the biggest stake; they were the investment banks. And as you point out, they watered down a lot of the provisions. The one that makes me the most upset is the too-big-to-fail part. We basically still have Too Big to Fail. Guest: Exactly.
21:40Russ: And so that's the way the world works. How do we get a world where power is not the decisive voice in political affairs? In other words, it's nice--let me make it a starker question because I think this has been a centerpiece of your work. You've been one of the, if not the most pioneering voice for the prevalence of market failure. And I certainly agree that markets fail all the time. They're imperfect. The question is: What's better? And I don't think it's easy to make the case that government in practice is better. Government in theory is better, but has government in practice made the case that we won't have these rent seeking and political power exploitations that you are as upset about as I am? Guest: In a way, when I was writing the book, one title that did occur to me is a paraphrase of President Clinton's campaign: "It's the economy, stupid." Russ: Right. Guest: It's Politics, Stupid. You're absolutely right. But I guess my view is that politics doesn't have to work this way. One of the themes of the book is that economic inequality leads to inequality of political power; inequality of political power feeds back into more inequality of economic power; that we are embarked on a vicious circle which is undermining both our politics and our economics. And so in a way what I'm saying is: we live in a democracy; we are supposed to be one person, one vote--that was in theory. We've deviated. I describe how we've become much more, almost a better description is one dollar, one vote. And we're back to just like the outcome of the economy is a result of the specific rules that lead to outcomes that serve special interests and exacerbate economic inequality, the rules of the political game have been leading to outcomes that exacerbate the effects of political inequality. So, in a way, I think you and I are probably on the same wavelength here. I think we need to reform some of our politics. I try to identify some of the reasons that things have not worked well in politics. Maybe I'm more of an optimist. I think that we can restore democracy and make our democracy more reflective of the views of our citizens. And those reforms are what gives me the hope that I referred to at the end of the book. Russ: Well, I like to say Republicans and Democrats are very similar: they both like to give money to their friends. They just have different friends. But they do have one friend in common, unfortunately, which is the financial sector. And both President Obama and Mitt Romney take a lot of money from there; and that mutes their ability to speak out against it; when they do speak out against it they reassure them privately that it's just for politics. Where we certainly agree is that I think that's our biggest problem. I think you devote more space in the book to the imperfections of the financial sector and the special treatment of the financial sector than any other part of the economy. And it is a big problem. One of the points that you make that I think is inadequately made in the public media is the role that the Fed has played in subsidizing the financial sector through low interest rates and now through paying interest on deposits at the Fed, which I think is totally corrupt. What would you do with the Fed if you had your druthers? Guest: Well, you are absolutely right that the hidden subsidies that the Fed has given, the lack of transparency, has been deeply disturbing. Part of the problem that I argue on the case of the Fed is that we need better governance, more transparency. I thought it was so disturbing that when Bloomberg wanted to know where the AIG money went, the Fed said it's not accountable; it doesn't have to obey the Freedom of Information Act. And then when the District Court said yes, you do, they still said: No we don't. And appealed. And when they lost their appeal there was actually a lot of discussion to say to challenge it all the way up to the Supreme Court; and what I heard the Administration said: You are part of the government, you have to be accountable. The way that the Heads of the Regional Banks are appointed, especially in the past, a large say [?] from the banks that they were actually supposed to be regulated is obviously a problem in governance. I think you need a central bank; but I think you need a central bank that's more accountable, and I think you have to have a central bank that's more representative. By that I mean it has to take into account the effects of its policy on workers, on unemployment. And right now I think the financial sector is disproportionately represented on the Board and those who serve there. Not as bad as some other countries, but still disproportionately. So I think I would make an explicit effort to make the Fed more representative. There are lots of qualified people who understand economics who are not beholden to the financial sector. Some of them are on the board. I think we need more. Russ: Yeah. Unfortunately I think the incentives there are not so good. I think you and I both would have agreed five years ago that Ben Bernanke is not beholden to the financial sector, but he has acted like every other Fed Chair once he's in the Chair. Guest: What I describe in the book is cognitive capture. You spend enough time there and you get taken by the people that you serve. This was an old point that George Stigler made. And that's why I think you have maybe some people who are less likely to suffer from that kind of cognitive capture. For instance, having maybe somebody who understand economics from the labor movement or from Non-governmental Organizations (NGOs), people who see themselves very much as guardians against that kind of capture. Russ: They might be harder to capture. Although you never know. I liked your point very much about cognitive capture, and I had the same thought, having been recently teaching the Theory of Moral Sentiments, by Adam Smith. He says in there that man by his very nature wants "not only to be loved, but to be lovely"--that is, to be appreciated by others and to have earned it. And I think it's easy for us to convince ourselves that we are lovely; and so I think that all the people on the Fed think that they are doing the right thing--and that's what you refer to by cognitive capture. And as you say, if you listen to the same small circle of investment bankers on your Board and others, you are certainly going to be able to convince yourself that what's good for investment banks is good for America. Which is not true. By the way, when I mentioned recently at a speech at the Fed that the Fed needed more transparency, the protest from one of the employees was that: We're the most transparent central bank in the world. Which is really faint praise, wouldn't you say? Guest: That's right. And actually we've not been, that the leadership--the Bank of England has really taken more of the leadership in transparency. But one of the things that I've noticed is that they are much stronger advocates of transparency when there's nothing to hide. Russ: Yeah. Guest: When they are only talking about whether to increase interest rates by a quarter or lower it by a quarter. When it came to dispensing the hundreds of billions of dollars of gifts to the banking sector, which they knew were going to be politically charged, they lost their commitment to transparency.
30:55Russ: Why do you think that they--one of the more embarrassing things that they did not want public was how much money they have given to foreign banks. Why do you think they did that? Not hide it, but actually subsidize so many and rescue so many foreign creditors? Guest: I think some of this has to do with these banks were intimately intertwined with American banks. In many cases through credit default swaps (CDSs), these complicated derivatives. And that's an example where our banks and our banking financial system remains after Dodd-Frank not totally transparent. Far from transparent. Not long ago there was a lot of uncertainty about what would happen when Greece restructured its debt. And no one knew because no one knew the exposure of American banks, European banks, the Greek banks, both directly but even more through CDSs, through these derivatives. And it was totally clear that we hadn't really fixed the lack of transparency. When you had that lack of transparency you can suffer from this fear, especially generated by the banks, they'll say if you don't bail out our partner here, he's going to fail and then he won't be able to pay us, and then we won't be able to pay somebody else. So the banks become too intertwined to fail, again a failure of regulation that they should have stopped. That I think is at least part of the reason that we bailed out those foreign banks. It was an indirect way of bailing out our own banks without seeing the money going there. Russ: Yeah. I'm afraid that's true. You know, the AIG bailout was not a bailout of AIG--it was a bailout of Goldman Sachs. Guest: The largest recipient. Russ: I think second. I can't remember who the number one was, but they were very close. Guest: Yeah. But the foreign banks that got the money, many people suspect that one of the reasons they got the money was again because of this intertwining with Goldman Sachs and other American banks. Russ: My theory, which is just speculative, as to why we didn't rescue Lehman is that many of its creditors were Japanese banks that didn't have any political voice, didn't have those intertwinings; it was just too bad. But who knows. That's just a speculation. Guest: But coming back to the theme of the book, all of this leads to inequality, because those are all institutions that have payment structures in which a few people at the top walk off with millions and millions of dollars. Russ: Hundreds of millions in some cases. Guest: Right. Russ: It's historically unprecedented, the transfer of public money to people who are already the richest people in human history. Let me challenge you on that, because many economists who feel the way you do--that is who are worried about inequality and very much focused on that--supported these bailouts. And I understood the short term issue. But I would have preferred paying the short term price. The long term price is destroying our political and economic system. But each time these bailouts occurred--and they go back to 1984 with Continental Illinois, some would say even before that, but it really starts with Continental Illinois in 1984; the Mexican bailout, which was a bailout not of Mexico but of American banks who were Mexico's creditors--all of these were supported by mainstream economists who said: Well, it's not attractive. Alan Greenspan, so-called free marketer, supported the Mexican rescue, the U.S. guarantee of their next round of debt. That was all supported as "necessary" at the time. And yet has sown the seeds for the misbehavior on the part of banks and the recklessness and the imprudence. How do we get out of that? Guest: I agree. There's a distinction that I'd make between saving the institutions and saving the bankers, the bond holders, and the share holders. I think it was perhaps necessary that we save some of these institutions. It was totally unnecessary that we rescue the shareholders and the bondholders and the bankers. If we had played by the rules of capitalism, which include conservatorship if the banks can't pay what they owe the shareholders get wiped out; the bondholders step in. If the bondholders can't fill the breach, then the bondholders get wiped out. Russ: Yep. Guest: If we had played by the rules of capitalism, we would have avoided creating the kind of inequality, the system of unfairness we have. We would have a more efficient economy. And we would have contributed less to this problem that everybody recognizes now of moral hazard. Because the banks realize that when they gamble, especially these too-big-to-fail banks, if they gamble and they win, they walk off with the profits; when they lose, the taxpayer picks up the tab. I think it was unconscionable. They say that they've fixed the problem. I don't know if you share my view. I think they clearly haven't. Russ: No, they haven't. Guest: The orderly resolution--when the next crisis comes, they'll do almost the same thing that they did in the last crisis. And the reason is the bankers will scare the politicians and they will tell them it will be the end of the world. It will be the end of the world as far as the bankers may be concerned, but it actually be better for our economy. Russ: Well, the main evidence for the fact that nothing has changed is that we supposedly fixed this problem in 1991 I think with the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which was not invoked in this crisis even though it was on the books. Guest: You're exactly right. Russ: It was special circumstances. The world's going to end, as you say.
37:49Russ: So, what would you suggest that we do to try to get some actual change and some accountability in the financial sector? What Milton Friedman called a profit and loss system. Which would be a good idea. Guest: Well, as we were talking before, underlying the problem is politics. I think we are going to need to make democracy more democratic. We're going to have campaign finance reform, do something about lobbying, something about the revolving doors; try to restore our democracy closer to one person, one vote; at least move away from one dollar, one vote. And I talk about some of the reforms that can be done there. I think in terms of the economics, I think most economists are fairly well agreed on the agenda for reforming the financial sector, for instance. We have to do something about the too-big-to-fail banks, too intertwined to fail banks. There's no reason or justification for the lack of transparency in the derivatives. There is no reason that a government insured bank should be writing these risky products. We may have a difference about whether they are insurance or whether they are gambling products, but whatever they are, they are not loans. They are not something that ought to go within a bank. And two of the Federal Reserve Heads to the Regional Banks, Thomas Hoenig and Richard Fisher share that view. But Tim Geithner and Ben Bernanke, cognitively captured by Wall Street, took the other view and they prevailed. So, I think in terms of the economic agenda of what needs to be done, I think there's a broad agreement among economists. The question is can we get it through the politics. And here I remain pessimistic with you. Russ: Especially when you have people coming to office as reformers, such as President Obama or President Clinton who vowed they would have the most ethical administration of all time. Very hard to stop that revolving door. Boy, is it hard to monitor. I think that will always be with us. Guest: Well, I don't think it has to always be with us. I think the issue has to do with these political reforms, and unfortunately things have gotten worse with a set of court decisions that have seemingly given more and more power to money. Russ: On the optimistic side, though, you have movements on the Left and the Right, which would be Occupy Wall Street and the Tea Party Movement, both of which agree that bank bailouts are a bad idea. So, that's some hope for the future. Maybe that will pressure future politicians a little bit, if those views become-- Guest: I hope so. And I think this is partly where the debate can become healthy. One of the things that I've felt good about my book is that in the discussion of the Price of Inequality, by focusing on some of the major sources of inequality--the rent seeking activity--there is actually common ground between the Left and the Right. And certainly among most economists, who do agree with me that rent seeking is a kind of activity that both increases inequality and weakens the economy. Russ: Yep. No doubt about it. My challenge, though, I think, for you, is calls for more regulation. You have to be optimistic in those calls that the story is going to unspool itself in a different way than it has in the past--that there won't be capture, that there won't be these distortions. Guest: We've been successful sometimes in the past of doing things right. I'm a Midwesterner, and maybe it's my Midwestern optimism that comes forward. But in the aftermath of the Great Depression we did pass Glass-Steagall. And Glass-Steagall did serve to stabilize our financial system for decades. We didn't have a financial crisis for decades. It was only as we began to strip away the regulations that we began to have more and more crises. Of course, as times change you are going to have to change the regulatory structure, so the real issue was: Could we have changed that regulatory structure to adapt it to the changing technology, changing economy? I believe we could have. But obviously, the [?] regulation movement that took place in the 1980s in the financial sector continued under President Clinton, didn't go in that direction. Russ: Yeah. You could make the same story about our housing policies. Post WWII, post Great Depression, the Fannie Mae seemed to be a useful part of housing finance, but [?] a not-very-healthy set of incentives that inevitably caused problems. It's interesting how long it took. But inherently--you could say the same thing about Social Security. It worked great when demographics were in its favor, but it has to change. Guest: Let me say on the housing thing that the critical mistake we made was you might say in governance, when we privatized it in 1968. Russ: Yup. Guest: And we didn't clarify the extent to which it was or was not a government institution even though it was privatized. And then we allowed it to get to be too big to fail, if we go back to one of the things we've talked about before. I don't think, whether it was private or public, we would have bailed it out, because it was too big to fail; and we knew it was too big to fail. What happened under a series of [?] was it lost its mission. Remember its mission was in conforming loans for typical Americans. It wasn't for people at the bottom. There was a separate agency for that. Russ: Or the top, by the way. In the last 10 years it got increasingly involved in both the bottom and the top. Guest: That's right, but in its mission of conforming loans, as they were called, they would not have gotten into the problem. The difficulty was, it had been privatized and the CEOs got jealous, I think, of the profits being made by CEOs in other financial institutions and said: We can do everything they can do and maybe even better. We're even bigger. We're even more too big to fail. And of course they did that. And of course they did fail. Then the government came to the rescue. Russ: And of course it became a useful tool for politicians to push them in directions that I think they were happy to be pushed because it allowed them in the short run to make a lot more money lending in those non-conforming loans.
46:00Russ: Let's turn to the economy as a whole. You have been an outspoken advocate for stimulus and the effectiveness of stimulus. I'm a skeptic. Tell me why you think the stimulus was successful and what we ought to be doing now. Regardless of whether it was successful or not, where are we at? Guest: Well, in evaluating whether it was or was not successful, the difficulty is what we economists call the counterfactual--what would otherwise have been. And I am convinced that had it not been for the stimulus, unemployment would have peaked at 12-13%. As it was it peaked at 10%. That's terrible. But the stimulus was simply not large enough, was not well-enough designed, was not of long enough duration to really address our country's problem. The underlying problem was lack of demand, lack of demand caused by several factors: 40% of all investment before the crisis was in real estate. With the breaking of the bubble, that went. The average savings rate in the United States was zero. That went, was not sustainable. With the breaking of the bubble, savings soared to 4-5%, not going to return to where it was--perhaps ever, because that was an abnormality. But you took away two of the major sources of demand. With demand that weak, something had to fill it in. It's not going to be investment when consumption is so weak. It's not going to be exports when our trading partners are so weak. And so the only thing to fill it in is government stimulus. Now, well designed government stimulus--investments in technology, infrastructure, education--yielding high returns might have more than paid back the cost of borrowing. Now the cost of borrowing is 0, 1, 1.5%. If a firm could borrow and have interest rates on the cost of investments comparable to what we can get in the public sector it would be foolish not to do it. When I was Chairman of the Council of Economic Advisers, we did a study on the social returns we got from Research and Development (R&D), and they were phenomenal. We didn't win every project, but if we had it would have been a sign that we weren't taking enough risk. But the average return from government investment projects in technology were actually huge. And no risk that we would not be able to repay the amount that we borrow. So, in my mind, right now, given our underlying problems of inequality, which is weakening our economy because as you move money from the bottom to the top total demand goes down--given our necessity of a structural transformation to adapt our economy, move it away from manufacturing towards an economy of the 21st century, the only way we are going to make this successful transition and recover will be through some form of government stimulus. Monetary policy is not going to work. And that we know. It's the one option. Russ: Well, some have said we haven't tried it. Guest: You're not going to lower short term interest rates below zero. Russ: No, but you can still-- Guest: And the long term interest rate is at 1.5%. In fact, we tried quantitative easing--QE1, QE2. And there's a good theoretical reason why in a world of globalization monetary policy isn't going to work. You provide liquidity in a world of globalization, the money goes to where returns are highest. And right not the returns are highest in the emerging markets, where returns are dynamic, not in the American economy that's moribund. Russ: Yeah, but if you make those investment you gain those benefits wherever you invest them, and those resources are still going to be available here. I think it's an open question. Guest: Well, we've tried it. I don't think it's an open question. I think we've tried it and we've seen what's happened. I mean, basically, why should we expect it to work? You provide liquidity out there and the global marketplace out there, it's going to go where they think the returns are highest. The returns in a private sense, not a social sense. Each firm is looking at where its private returns are highest. American companies are saying: I can produce more cheaply abroad; tax advantages are moving my companies abroad. And bring the goods back to the United States, jobs abroad, sell the goods in America. Of course right now they can't sell the goods in America, the economy is not doing very well. Russ: Consumption spending is still very high. Guest: Oh, it's still high, but it isn't like it was. Russ: I think it's back. I haven't looked at it lately, but I think it's above its 2007 peak. Guest: Oh, yeah, I know. But in half a decade, if we are going to have a strong enough economy to find jobs for the labor force, that's not good enough. Russ: Well, I agree with that; at least I agree we're not doing well enough to take care of those folks.
52:10Russ: Let's go back to the fiscal side and the stimulus side. You argue that in the absence of the stimulus we would have had a much higher unemployment rate. But of course the proponents of the stimulus at the time said that would not happen. They said that if we didn't have stimulus, unemployment would reach 8.5%, I think was the fear. Guest: I agree--Obama's team made a critical error in underestimating the severity of the downturn and the employment effects. In my book Freefall, I try to explain why I was not surprised they had underestimated. I mean, after all the Obama economics team included some of the people that were the deregulators, people that were supposed to be supervising the New York banks, people whose achievement was to give unbridled deregulation to derivatives. So, they didn't want to admit that they had really messed up. They didn't want to admit that the financial sector had really messed up the economy so badly. So, I didn't think they had a great incentive to try to minimize the scope of the economic downturn. And it was politically and economically a major mistake on the Obama Administration. I was always more pessimistic about where the economy was going. What I was talking about was not complicated economics. I just saw the magnitude of what was going on in housing; they were trying to pretend the housing problem was not significant. I thought the housing prices were going to go down; turned out I was right; they went down by more than 30%. I thought consumption was going to go down because the savings rate of zero was not sustainable. And again, I was right. I find it unbelievable that they misestimated it as badly as they did. But that doesn't answer the question whether the stimulus worked. The fact that they had not taken a correct assessment of the economy does not mean that they weren't right about what we call the delta--what the extra effect of the government spending would be. Russ: Yeah. The problem though. You were right, lets say. There are always some people who are right ex ante. There's always many people who are wrong, who ex post can tell a story as to why they were right anyway. At the time, Alan Blinder, who is as accomplished an academic Keynesian as there is, did a calculation to claim it was just about perfectly sized. Others said it was too small--you and Paul Krugman. Others said it was way too large. And the problem I have--and I'll raise this as more of a philosophical question than a particular question about the mess we're in--I don't see any really useful way to evaluate those different claims. The CBO, which is not-- Guest: Let me tell you--see, the framework that I had argued for at the time of the crisis recognizes that there's going to be different opinion and uncertainty. I mean, obviously I thought I was right. But I had to recognize that there were other people who had different models with different views. And try as I could, I couldn't always persuade all of them. So, what I said is the following: Let's have some programs which are automatic stabilizers. What do I mean by automatic stabilizers? Policies that would spend more money if the unemployment rate remained high, like stronger unemployment benefits, but would diminish if the unemployment rate came down. Another example: I was very worried from the beginning about the states and localities. Because I've seen this before--states and localities have balanced budget frameworks; especially with the property tax being so important at the state and local level; property values going down, I estimated by a lot; Bob Shiller estimated by a lot; that tax revenues were going to go down; that would mean cuts in expenditure; that was going to mean weakening of the economy, unnecessary layoffs of teachers, firemen, policemen. So, I said let's have a program that will fill in the gap. If tax revenues go down in the way that I anticipated. But if they didn't go down, we wouldn't have to fill it in. Because the economy was strong, we wouldn't have to fill it in. So, that was a way that we could have squared the circle. We could have said, okay, if I'm right we're going to have to spend a lot of money on these programs; if you're right, the economy's not weak, we won't spend the money. I'm just as happy not spending the money if we don't need it. But unfortunately the Obama Administration and Congress would not adopt these automatic stabilizers. Russ: Well, they did a little bit. Guest: A little bit, but not much. Russ: To the extent they continued to extend unemployment insurance. Guest: Yeah. But they really only extended the program a duration of time. And now we're facing a problem that many people have run out of unemployment benefits. People have looked for a job, want them, look, and can't find one; and we didn't do anything about the states and localities. And the result is that now public sector employees are now one million lower than they were in 2007; and these cutbacks are exacerbating the downturn. Russ: You think they are 1 million lower than 2007? Guest: Yeah. The combination of state, federal, and local--the numbers I've seen are about 1 million lower, three fourths of that at the state and local level. Russ: Yeah, there has been a small cutback from the peak. I don't think the peak was 2007 though. Guest: Maybe in 2008. Whatever it was, the peak, it's a million down. I don't have the numbers right in front of me. But it is significant. Russ: I'll post those. I'll find a source or you can send me a source. But let me come back to this philosophical question. If you look at the CBO estimates of the effect of the stimulus, which are not actual estimates but are just recalibrating the model for the actual amount that was spent, their effect on employment is a six-fold range. That is, when they say: Well, in the third quarter of 2011 so many jobs were created--this is again not an estimate based on the data but essentially a forecast using the amount of money that was spent--the range that they provide to show that they are scientific is 6-fold. That is, the high end estimate is 6 times the low end estimate. It's not very precise. And if you look at the survey of multipliers that Valerie Ramey--she was a guest on this program recently--the range is enormous. And obviously that's a result of the complexity of our economic system and the challenge of scientifically figuring out what the right specification is for estimating these. If you are an interventionist, you find a big multiplier; if you are a laissez faire, less interventionist person, you find a small multiplier. Strangely enough, you confirm-- Guest: Can I-- The problem is really difficult right now for the following reason: We don't have deep downturns--fortunately--very often. Russ: Correct. Guest: The last time we had a deep downturn anything near this was the Great Depression. And the world has obviously changed a lot in 80 years. Many of the studies of multipliers--most of the studies of multipliers--are focused--in fact I would say all of the studies of multipliers--are focused on situations where the unemployment rate is much lower. Many of the poorly done studies of multipliers include periods in which we have full employment, i.e., no significant unemployment. There was a totally deceptive in terms of analyzing the multiplier, because we know--there's no disagreement among economists--if the economy is at full employment and you spend more on government, something is going to give. Because you can't increase the size of the pie. You are not going to increase employment significantly. And so you are just displacing--the government spends more, the Fed is going to raise interest rates, investment is going to go down, something else is going to have to give. And so in that kind of a world, a zero multiplier or even a negative multiplier is possible because you are disturbing the equilibrium. So, the fact that a lot of the time you have a zero multiplier says absolutely nothing about the current situation. And, uh, what an experience where we have 3-4% unemployment or 5% unemployment says about a situation where you have prolonged unemployment of over 7% again is of some question. So that's in my mind the fundamental flaw in most of those econometric studies. Now the difficulty is, what do we do? Because we don't have the data. And that's where I keep coming back to: Well, we have to have flexibility. We have to use things like automatic stabilizers. What we need to do is so long as we can stimulate the economy in any way we can to get back to full employment, we ought to be doing that. Because the price that we are going to pay is going to be very high. We are going to pay a price of inequality. When you have this high unemployment, wages get bid down, social services get cut back, investment in education gets cut back--it's going on today. And so we get more inequality and we are putting in jeopardy our economy today and our economy in the future.
1:03:06Russ: And it's especially hard on people without education. Guest: Very much harder. Russ: It's about a 3-fold difference in the unemployment rate on people without a high school diploma and those who have college degrees. It's a brutal situation. The question is: How do we make it better? Just to sum up: You are very critical of Milton Friedman in your book and his philosophy. It's a philosophy I basically subscribe to, which is a philosophy of smaller government because I don't trust the feedback loops that regulators put in. You are more optimistic about that. I am more optimistic about the ability of the private economy to create opportunity. As you mentioned earlier, I look at immigrants who come here. They seem to thrive. I think if you get a college degree and you study something serious--and there's tremendous access to college now; that may not last because the loan programs may be troubled. But I see a half full glass; you see half empty, to a large extent. Let's close, let's talk about why you are optimistic and where you think--not where you'd like us to go but where you think we are going that is encouraging. Say something cheerful. Your book is very depressing! Guest: Yes. Well, things are depressing. And a lot of my book is trying to prevent us from things getting worse, that America I think in some ways has lost its dream. What you say is right that we've had moments that we've given opportunity; that people have made it to get ahead; that we have great universities. We have great innovation. But the data are looking more and more bleak. That access to education, access to opportunity is declining. The chance of somebody from the bottom making it to the middle or to the top is lower than even in old occupied Europe. If we don't do something we won't be able to compete in the global marketplace. I'm trying to argue that we are paying a very high price. We have a very high level of inequality, a higher level than most Americans realize; a lower level of equality of opportunity, lower than most Americans realize. But that we can pull back. It's not that hard. And that's a moment of optimism that I'd like to say. In other moments where we faced this level of inequality we have pulled back from the brink. This is not the first time we've faced these unbridled levels of inequality. The Gilded Age, the Roaring '20s--each of those instances we pulled back from the brink. We had the Progressive Era, we had the social legislation of the 1930s. And the optimism is that if we could only grasp the challenges that we are facing, understand the way things are going, realize that we can have a more equal society and a more dynamic economy--that the two can go together--then of course we will be laying the foundations for a future shared prosperity. And that's what I'd like to see--a shared prosperity where all parts of our country do well together.

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