Diane Coyle on the Economics of Enough
Mar 21 2011

Diane Coyle, author of The Economics of Enough, talks with EconTalk host Russ Roberts about the future and the ideas in her book. Coyle argues that the financial crisis, the entitlement crisis, and climate change all reflect a failure to deal with the future appropriately. The conversation ranges across a wide range of issues including debt, the financial sector, and the demographic challenges of an aging population that is promised generous retirement and health benefits. Coyle argues for better measurement of the government budget and suggests ways that the political process might be made more effective.

Diane Coyle on the Soulful Science
Diane Coyle talks with EconTalk host Russ Roberts about the ideas in her new book, The Soulful Science: What Economists Really Do and Why it Matters. The discussions starts with the issue of growth--measurement issues and what economists have learned...
Diane Coyle on GDP
Diane Coyle, author of GDP: A Brief but Affectionate History, talks with EconTalk host Russ Roberts about the history of GDP, its uses, and its abuses. Topics discussed include the origins of GDP in the developed countries, the challenges of...
Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Mar 21 2011 at 8:51am

I enjoyed this podcast very much. I think I’m going to listen to it a second time.

I, like Diane, find it troubling that we aren’t more willing to experiment with, pilot and trial things. In her example about competition in health care (‘we don’t want it, we just want our one thing to work well’) she mentioned the root cause — folks don’t understand the dynamic process of competition and I’d add experimentation, success and failure. I see (and fight against) this tendency in the private sector also.

Russ said that politicians won’t admit mistakes and make changes. It’s not a mistake to try something that may not work. The mistake is rolling out something that may not work so that it lasts forever. They make this mistake because they are emotionally attached to their ideas. The trick is detaching their emotions.

David B. Collum
Mar 21 2011 at 11:42am

I really enjoyed what I could hear but the audio was terrible (or my ears are getting worse). Sounded like it was on a speaker phone (possibly in the shower). Maybe that’s why Seth is going to listen a second time.

Mar 21 2011 at 3:14pm

One note on congestion pricing. A system like the one you talked about was introduced in Stockholm, Sweden for a trial period of seven months, after which a referendum was held and the system was implemented on a permanent basis.

Check it out, even though it has several flaws (does not differentiate between large and small cars as an example) it’s been widely regarded as a successful.


Here is a short IBM commercial about the system:

A. Zarkov
Mar 21 2011 at 6:10pm

Total government spending in the U.S. is a lot more than 25% of GDP. State and local governments spend about 20% of GDP themselves. So I dispute this idea that we in the U.S. have half the spending in the U.K., and thus we could raise federal taxes and pump up spending even more. Most everyone here pays sales taxes to their state governments, where Britain has the VAT, which is of course much more– I think somewhere in the range of 19% to 21%. That’s really a lot.

I wonder if anyone has done an analysis to see if the Pareto principle applies to taxation, where 80% get the benefit of taxes, but only pay 20 of the total.

Mar 21 2011 at 8:13pm


The IBM commercial freaks me out, along with all of their other “building a smarter planet” commercials. They are very central-planning oriented and implicitly say that so long as we get the algorithm right in the computer, we can let the central computer run our lives. Yes, I understand that traffic can be a common pool resource problem and one could frame the Swedish rsponse as a nation-wide Ostrom-like solution, but if you have ever seen the other IBM commercials what is basically being said is that we should hand over our lives to the computer experts. Sorry Google, but you don’t get me that easy. (BTW, I’m in a city that just recently implemented a smart freeway system and it hasn’t done diddley.)

More general observations:

And was anybody else bothered by this comment by Coyle (paraphrased from the transcript): “we have the issue of climate change, and the science there is contested, but I think scientific opinion is that it’s a pretty serious problem, but disagreement about what to do about it.” This reminded me of the podcast two weeks back who argued that current climate science is bad science, but we had better increase environmental regulations to solve our problems anyways. (Russ, you really need to get a free market environmentalist on the show).

Also, I found her response to the financial crisis odd for an economist: run to the bank as quickly as you can and withdraw all your money. I’m wondering if she asked for her savings in the form of gold specie or rare Spanish doubloons?

And what of this “economics of enough”? Is that really all that well thought out? First off, how does Coyle know how much is enough for everybody? (Loved Russ’s comment regarding the presumption of us knowing what future generations would want. My colleagues in the city tell me I don’t need a truck, whereas I find a Prius to be totally useless on my property.) Second, and I hope I don’t sound Keynsean here, but what happens if we just stopped producing stuff at the levels of productivity we have today? How do we make a move towards producing “enough”? Do we tell people to work less hard? Go back to IBM 5140s on everybody’s desk? Perhaps we have produced “enough” economic journal articles and books about “enough”! Enough I say!!

I couldn’t help thinking about Thomas Sowell’s Intellectuals and Society and Vision of the Annointed as I listened to this podcast.

Mar 22 2011 at 8:50am

A. Zarkov writes:
Total government spending in the U.S. is a lot more than 25% of GDP. State and local governments spend about 20% of GDP themselves. So I dispute this idea that we in the U.S. have half the spending in the U.K…

UK government spending includes the NHS costs. What would US government spending look like if private US health costs were instead paid out of tax money?

Cowboy writes: And was anybody else bothered by this comment by Coyle (paraphrased from the transcript): “we have the issue of climate change, and the science there is contested, but I think scientific opinion is that it’s a pretty serious problem, but disagreement about what to do about it.”

Every time this subject comes up I’m reminded of the way the tobacco companies kept saying, ‘but there’s no *proof* that cigarettes cause lung cancer.’ Technically they were correct, as ethically you’d never be allowed to conduct double blind trials on smoking, just as we can’t conduct double blind trials on the Earth’s atmosphere. But, on the other hand, is it better to give up smoking before the ‘proof’ comes in, or should you ignore the hospital wards full of smokers and keep on puffing away until someone’s managed to prove that it’s bad for you?

” …I found her response to the financial crisis odd for an economist: run to the bank as quickly as you can and withdraw all your money…

This is bizarre, especially as most ATMs will only let you take £100-500 per day. Are economists prone to fiscal hypochondria, the way doctors are prone to the medical variety?

IIRC, Coyle warns in the podcast about inflation getting out of hand in the UK and today the papers are abuzz with the ‘shock jump’ in the UK CPI inflation rate to 4.4%. Ok, it’s not runaway hyperinflation, but I’m wondering just how much impact podcasting dire warnings can have on an economy. ; )

Mar 22 2011 at 1:45pm


I am certainly not for any social engineering by computer nerds. I provided the video only for information about how the system works.

This is not a Sweden-wide Ostrom solution. It’s a Pigouvian tax for congestion externalities (noise, pollution, long travel times) in Stockholm. It doesn’t take an economist to grasp that zero private marginal cost for using roads in densely populated metropolitan areas is a recipe for congestion. Using the new OCR-technology is cheap way for the municipality to introduce a cost reflecting the social cost. Of course there are several Big Brother-concerns with a system that registers passages into and out of the city but it’s a free and conscious choice to take the car into the city. When you consume both public and private goods and services there will always be integrity concerns since you don’t really know what the provider will do with your personal data (google and facebbook are the most prominent examples here).

Matthew Bogosian
Mar 23 2011 at 12:08am

Mr. Roberts states:

I don’t think [Hank Paulson and Ben Bernanke] malevolently sat around thinking of ways to exploit taxpayers. I think they were genuinely scared. But I think the issue is: Who has got the incentive to be prudent? Politicians and regulators will never have that incentive, because it’s not their money. It should be. We should try to create a system where the banks have the incentive to be prudent because they are the ones closest to the information and the money. When you have a system where that’s not true, you should expect nothing but disaster. So although I’m sympathetic at some kind of personal level–I don’t think Hank Paulson or Ben Bernanke or Alan Greenspan are malevolent, evil people–I think the system didn’t give them an incentive to be careful.

This seems naive. Mr. Roberts makes it sound like Bernanke, Paulson, Blankfein et al. were merely operating within a system that spontaneously came to exist. Goldman Sachs lobbied, wrote laws, and pressured regulators to create much of the broken system that provided these perverse incentives. It did so under Paulson’s and Blankfein’s direction. Mr. Roberts asserts that politicians and regulators are ill-suited to create a better system. Very shortly after the above quote, Mr. Roberts points out the problem of the revolving door, but fails to connect these two thoughts…somehow the “system” is to be blamed.

The system is those banks. If it were anything else, those banks wouldn’t exist anymore.

It cannot be the banks that create something better. If left to their own devices, they would offload 100% of all losses onto taxpayers while keeping 100% of all gains. It cannot be the politicians who create a better system, because they succumb to pressure from the banks. So who can it be? Even if we could design a solution to provide proper incentives, who is to implement and enforce that solution?

A. Zarkov
Mar 23 2011 at 1:41am

NeilE asks:

“UK government spending includes the NHS costs. What would US government spending look like if private US health costs were instead paid out of tax money?”

The U.S. spends 15%-17% of GDP on on medical services. I think the the U.S. federal government pays for something like 50%. Add 8% to 22% (federal spending before Obama) for 30%, which is less than than the 40%-45% of GDP the U.K. spends.

I don’t understand the advantage of paying for one’s medical services through taxation. Why hand the government money who in turns hands it to a doctor? Why not pay directly and avoid the expensive middle man?

NeilE writes.

“Every time this subject comes up I’m reminded of the way the tobacco companies kept saying, ‘but there’s no *proof* that cigarettes cause lung cancer.’ …”

Indeed science proceeds inductively, not deductively. We can’t prove the impossibility of building a perpetual motion machine, we just take it as a given based on experience. But let’s set the record straight on tobacco. Both R.A. Fisher and Dr. Joseph Berkson defended tobacco in the late 1950s. Fisher was one of the greatest statisticians of all time. He invented the randomized trials technique widely used in medical studies. Berkson, trained in both medicine and medical statistics, was Chief of Medical Statistics at the Mayo Clinic. Mayo has its own statistics group, and one of the best, if not the best repository of medical information in the world. Normally Fisher and Berkson agreed on little except the methodological shortcomings of the case against tobacco in the 1950s. Based on the knowledge available at the time, they raised reasonable objections. They were of course wrong, but we didn’t know that until much later when new data became available. For the details read the essay B. W. Brown (Stanford University School of Medicine) in Statistics a Guide to the Unknown.

The issue of global warming is of course much different. Not smoking is a personal decision. Curtailing or eliminating the use of fossil fuels by government mandate is quite another. Moreover what we in America and Europe do is irrelevant. China, India and the Third World will use fossil fuels to develop their economies, and they will be the dominant source of carbon emissions in the future. The Third World has already gotten a pass and they are free to warm the planet until they develop their economies to match ours.

Mar 23 2011 at 10:34am

Cowboy writes:

“we have the issue of climate change, and the science there is contested, but I think scientific opinion is that it’s a pretty serious problem, but disagreement about what to do about it.” This reminded me of the podcast two weeks back who argued that current climate science is bad science, but we had better increase environmental regulations to solve our problems anyways.

I think Diane Coyle’s argument is much less intrusive as a means of policy than this argument implies. She said that many people agree there is a problem, but there is not consensus that environmental regulation is the answer.

A. Zarkov writes:

Not smoking is a personal decision. Curtailing or eliminating the use of fossil fuels by government mandate is quite another.

This comparison to smoking does seem to be a good parallel. While smoking cigarettes is a personal decision, it affects the quality of life of those around you – second-hand smoke, smells that are offensive to much of the population. These effects on non-partakers were the drive behind the restrictions on smoking indoors in many places. Even before the laws went into effect, many businesses voluntarily implemented policies to the same effect, which often increased their business. Further, because there are long-term health impacts, the government, as a major payer into the health benefits of the citizenry, has a vested interest in reducing health costs. Result: indoor smoking bans and cigarette taxes (which I imagine partially fund health costs of the effects of smoking, along with prevention campaigns).

Here, in the issue of climate change, the case has been presented that human activity (collections of individual choices) may be affecting the climate at large. First, as the world’s current largest consumer of energy and fossil fuels, it’s incorrect to say the US is irrelevant. Second, as Diane Coyle stated, there is not consensus about what to do policy-wise. Cap-and-Trade has so far failed to pass Congress, so perhaps the representative majority of the country agrees that is not the best way to try to combat this problem. Perhaps a tax like we have on cigarettes, which just increases the cost, but still allows personal choice. Obviously, anything that increases individual costs may be unpopular, but some action may be warranted even against this pressure. Other options may also exist that are better than these ideas, but first acknowledging that there is a problem there to solve is a good starting point.

A. Zarkov
Mar 23 2011 at 12:35pm

chit_nick writes:

“First, as the world’s current largest consumer of energy and fossil fuels, it’s incorrect to say the US is irrelevant.”

China has already surpassed the U.S. as the world’s biggest carbon emitter. Currently China emits 30% more than the U.S. However if you read me carefully you will see that I was speaking about the future. China will continue to develop and increase its GDP at a rate of about 10% per year. India too is developing. No matter what the US does to curtail its carbon emissions China and the Third World will continue to use fossil fuels. China has enormous reserves of coal and it fully intends to use this cheap source of energy. Currently China builds one new coal-fired power plant per week. This is why China has such a big carbon intensity, the key parameter to look at. UC Berkeley physicist has done the calculation. See here. Note his graph. The great bulk of all future carbon emissions will come from China, India and the rest of the Third World regardless of what the U.S. does. Cap and trade or a direct tax on U.S. carbon emissions will do very little to the level of atmospheric CO2 in 2020 and beyond. Since fossil fuels are about the optimum energy source in terms of cost and energy density, China is forced to use its coal if it wants to develop. No only that, as I said, they have been given a pass by western leaders. Not that we could do anything about it anyway. Taxes on carbon, solar, wind turbines, electric cars are all irrelevant to the world’s future warming. I’m assuming that the IPCC prediction of 3 degrees C increase for a doubling is correct. As you can see the scientific question has become moot. Absent some miracle energy source for China that’s both cheap and abundant, they will continue to emit carbon in great quantities. China has agreed to cut it’s CO2 intensity by 4% per year over the next 5 years. Don’t confuse intensity with emissions. The press often omits the key word “intensity” making it seem that China is going to emit less carbon each year. Not so. Emissions will keep increasing.

So if we go ahead ruin the U.S. economy by increasing the cost of energy, it will drive even more manufacturing to China and result in even greater carbon emissions. Again it does not matter what we do.

A. Zarkov
Mar 23 2011 at 12:54pm

chitown_nick writes:

“Further, because there are long-term health impacts, the government, as a major payer into the health benefits of the citizenry, has a vested interest in reducing health costs.”

Paradoxically smoking actually decreases health care costs on a life cycle basis. Medicare spends most of its money on the chronic diseases of the very old. Smoking early in life causes premature death. These people don’t live to the age where they get really expensive. Several studies have backed this up. Yes the suit against the tobacco companies was a fraud based on erroneous calculations in that smoking does not increase Medicare costs. Junk science law suits are nothing new. The whole class action against suit about silicon breast implants against Dow was a sham too. Unfortunately once the award is made, defendants can’t claw back the ill gotten gains from the lawyers and plaintiffs.

Finally always remember the Pareto principle aka the principle of factor sparsity. In the medical insurance business 80% of the costs come from 20% of the subscribers.

Adam Gicz
Mar 24 2011 at 7:21am

A. Zarkow writes: “China has already surpassed the U.S. as the world’s biggest carbon emitter.”

Shouldn’t we rather speak of per capita emissions?

I must admit I am often baffled by Econtalk. This time is no different. Maybe someone can enlighten me.

So, I just don’t understand all this talk about pushing future generations into debt. If “we” are the borrowers, who are the lenders? Lending money is a way do defer present consumption in the hope of greater consumption in the future, isn’t it? So who is deferring their present consumption? Who is going to demand “our” pound of flesh?

Secondly, how can “we” borrow in the name of future generations? Normally, if I get into debt and die, my children can refuse the inheritance and the debt with it. Why can’t this happen here?

Thirdly, isn’t it nit-picking to claim that we can’t predict what future generations will need? Not in detail, of course, but isn’t it reasonable to predict that they will need food and an environment that supports human life, free from poison and radioactive contamination, not a desert, not submerged in the sea.

Lastly, I don’t really understand why people are so worried by financial crises. It seems to me that these are relatively simple to deal with – it’s only about money, so it’s only about who owes how much to who. That’s nothing compared to a real crisis, for example, desertification, deforestation, food shortage, destruction of the environment.

Sorry for asking so many questions!

Mar 24 2011 at 8:06am

I agree that the big banks helped to create the system of perverse incentives that lead to the crisis but they were not only facilitated but to some exent lead down that path by pols and regulators. To argue that we should have a system where large investment banks are partnerships you have to deal with the following issues, rarely if ever discuss; margins on banking advice shrank as banks used lending to move into that business, long before the repeal of glass stegal; the two biggest offenders, Bear and Lehaman were also the two firms where senior management still owned the laregest equity stake; the creation of asymmetric risk goes back at least to continental illinois if not to FDIC and so to argue that this was entirely bad you must make the conterfactual that we would be better off if none of those interventions ever happened. Philosophically I believe that but I have witnessed one heck of a lot of irrational behavior over the last 27 years that makes me wonder.

Mar 24 2011 at 9:30pm

Adam – The borrower is not literally us, it is the US government, the lenders are the bondholders – a mixture of private investors, institutional investors and sovereign wealth funds. When the bonds become due, the money will be have to be paid back by future taxpayers – hence the idea that “we” are burdening “future generations.”

The US govt has institutional continuity, so it’s not a question of refusing an inheritance. What future generations could do is vote in politicians who refuse to pay back what has been borrowed, and thus default on the debt. However, to the extent people believe that is likely to happen in the future, they will not lend the govt money today.

You are right that we have some idea what people will want in the future, but I think you are making things too easy by focusing solely on the environment. Governments make many other large-scale investments – for example, transport networks may become obsolete as technology changes, or population centres move.

Lastly, financial crises are not just about who owes money to whom. It seems that, as a whole, the world is not as rich as it thought it was, meaning fewer resources will be available to deal with the problems you identify – there will be more environmental degradation, more people going hungry, etc. People are not worried about the green pieces of paper, they are worried about the real-world effects, which are very serious indeed.

A. Zarkov
Mar 25 2011 at 3:27am

Adam Gicz writes:

“Shouldn’t we rather speak of per capita [Chinese CO2] emissions?”

Depends on the context. China’s total CO2 emissions depends on its industrial activity which is increasing much faster than its population. Specifically China’s population growth is about 0.5% per year while its GDP has been growing at 10% per year. If we want to estimate China’s CO2 emissions in 30 years, then we look at CO2 intensity (amount of CO2 emitted per unit GDP) and GDP growth. Since China is expanding from a small base, it can probably continue to grow at something like 10% per year. They are simply playing catch up with the U.S. and Europe. On the other hand, the U.S. GDP has been growing at about 3% per year and our CO2 intensity is lower than China’s. Thus in 30 years China’s carbon emissions from industrial activity will be far greater than the US. In fact it’s already 30% greater and China has lots of room to grow.

Western leaders give China a pass on CO2 emissions because their CO2 per capita is small compared to the US. Thus CO2 per capita counts in the political-ideological arena, not in the atmospheric physics arena. In the latter it’s the absolute level of emissions that count because the CO2 gets mixed. Global warming depends on the total of emitted CO2 by all countries.

A. Zarkov
Mar 25 2011 at 3:53am

In my opinion, this podcast falls far below the excellent interviews we usually get at EconTalk. I find Coyle’s narrative muddled and mostly uninformative. Compare her to Richard Epstein, Douglas Irwin, Robert Laughlin, Mike Munger, Freeman Dyson etc. She gives us a lot recycled ideas along with vague speculations about the future. As Yogi Berra said, “Prediction is very hard, especially about the future.”

Adam Gicz
Mar 25 2011 at 7:13am

Salem: Thanks for your answer. I understand now why disowning the inheritace is not an option 😉 but I’m not quite sure if I understand your other points.

Re US government debt: money owed to foreign entities is a different matter, but I don’t see why internal debt should be such a problem. Basically, it’s the same party on both sides of the transaction, isn’t it? The bondholders are the taxpayers. The government need not refuse to pay them back, it will just tax the creditors, but that’s a technicality.

I’m assuming that the US is a democracy, so that, on the whole, resources are allocated by the government to what is in the interest of the general population. So, if the goverment spends money on social programs, health care, education, public infrastructure, environmental protection etc, it’s ok — whether it’s money collected as tax now, or money borrowed now and collected as tax later is immaterial. It’s not ok if the government borrows money to spend it on wars of aggression or on showering Wall Street CEOs with bonuses, and I can see how borrowing it, rather than collecting it as tax now, would be seen as a Madoff-like scam perpetrated on all Americans (save a few who benefit).

Re predicting what future generations will need: I assumed we were talking about whether it was rational to worry about global warming and whether it was a good idea to forego some gadgets now, because we risk that if we don’t, future generations may not have enough to eat. If we take out more oil from the ground and convert it into garbage, that’s economic growth (in the sense of GDP), but do we really want it?

Re financial crises: you say “It seems that [after a financial crisis], as a whole, the world is not as rich as it thought it was”, and you clarify “People are not worried about the green pieces of paper, they are worried about the real-world effects”. I’m afraid I just don’t understand. Are you saying, “before the financial crisis, we thought the world could produce X tonnes of food, now we know it can only produce half of that”? If that’s what you mean, could you explain how you reason from the crisis to the revised estimate of food production capacity?

A. Zarkov: per capita CO2 emission in the US is important not because it has a decisive impact on the atmosphere, but because it’s demoralizing for the rest of the world. Humans must make sacrifices, so ALL humans must make sacrifices, and this has to be enforced without exception. Otherwise, no one will make sacrifices. It’s called “the tragedy of the commons”. I think people in the US should see that it’s in their own interest for the US to be bound by international law to limit its emissions. It would be silly to demand that just one exception be made — for the US. Clearly, this will not be granted.

Troy Robertson
Mar 25 2011 at 8:38am

First time I’ve commented on the site, and I’m only doing so now because I saw this article:


It complicates Diane Coyle’s ‘competition’ illustration and, I think, undermines it as a simple narrative for what ails other systems. Perhaps it’s not that Kenya’s market is more ‘free’ (from gov’t regulation) and therefore more ‘competitive’ – perhaps it’s that Kenya’s market is a bit of a wreck and therefore free from big competitors with their own interests at stake. The objection occurred to me as I listened, but this article delves into it a bit.

Great show, as always – very thought-provoking even if I don’t always agree. Keep up the good work!

John F
Mar 25 2011 at 8:44am

The part about “culture” caused me to reflect on McClosky’s most recent works. Whence comes this culture which appreciates innovators and capitalists? And why does it surface? And will it endure? We’ve had 200+ years of prosperity with McClosky’s putative “Dignity” in place; only 200 years.

So,when Coyle tells the story of the government subsidized alms giver in England, worried about “austerity measures” limiting her beneficence, with Coyle’s note that too many people see the government as sine qua non in regard to altruism, I worry that the “culture” is less than permanent, and McClosky’s “Dignity” of the bourgeoisie in jeopardy.

One other point about Coyle–is that she seems to underappreciate that because humans can’t collectively agree on the division of produced goods in the present, which is the inherent conflict within any form of governance, a collectively agreed upon course for future distribution ain’t really ever on the agenda. The Brits, for example, with their beloved national health care system, can’t reasonably think that the allocation of resources to “medical” research is sufficient for the needs of future generations. But it’s “free” to the presently living and, therefore, much loved.

Mar 25 2011 at 6:44pm

Regarding Dodd-Frank, the regulators don’t have the resources to write the mountain of regulations by their deadlines. Who do you suppose will provide a helping hand?

Regarding the share of GDP raised by taxes in the U.S. and U.K., as Zarkov points out above you’re comparing apples and oranges. If you add up Federal, State, and local taxes, we’re within spitting distance of the U.K. or European shares, I believe.

I have a serious quibble with her wish that the Prime Minister and other leaders would point out that the bankers were “immoral.” Part of the problem with morality is that our leaders don’t lack the courage to criticize unpopular or politically correct targets, and the financial industry has in fact been getting quite a bit lately. But there’s less willingness to criticize other deserving targets, as witness the silence, for example, at the thuggery of the public unions in Wisconsin. And what politician has the courage to seriously address the morality of welfare-state induced dependence, which both you (Russ) and Diane agreed at the outset was a serious social problem?

Quibbles aside, Diane Coyle was a great guest, intelligent and thoughtful, though I too wish the audio had been better.

Mar 26 2011 at 11:41am

Reply to Adam Gicz on why excessive government debt is bad: The issue isn’t really whether the government owes money to foreigners or Americans. If government debt grows so large they can’t raise money to pay it back, the government will stiff its creditors, foreign or domestic. If they stiff Americans, it’s a transfer from some Americans to others without consent or legal mandate. And isn’t stiffing creditors stealing? And wouldn’t it lead to loss of trust and confidence in our government, and maybe other institutions? and wouldn’t that reduce its effectiveness? And isn’t stealing still bad, whoever the victim?

Mar 27 2011 at 9:04pm

I hate to say “we.” There is no coordinated activity, just emergent phenomena that may burden or help the next generation.

BS! We organise ourselves into all sorts of collectives and make conscious collective decisions. At one incontestable level in nation states and laws. I am not saying that there is no “emergent phenomena” but to assert that that is all there is is very silly!


Emerson White
Mar 27 2011 at 10:03pm

I really enjoyed her as a guest, and look forward to reading enough of the books that I already have to justify buying her book.

Adam Gicz
Mar 28 2011 at 5:28am

emerich: I seems to me you haven’t read my post you claim to be answering. I wrote: “The bondholders are the taxpayers.”

There is an essential difference between foreigners and Americans vis a vis the US government: no taxation without representation.

Krzysztof Ostaszewski
Mar 28 2011 at 10:50am

The sound quality was very, very, very bad. Almost eliminating the value of the podcast. Please consider this for the future podcasts.

[We sincerely apologize for the imperfect sound quality, and we thank you and others for your observations. Occasionally the phone connections are not ideal. I assure you that we do take this into account. Sometimes it’s a tradeoff amongst a number of factors. Those factors could include balancing prior listener requests for a particular guest, scheduling or rescheduling conflicts, whether there is an alternative guest or podcast lined up that could be produced in time, etc. We appreciate your input. Feel free to email us at mail@econtalk.org or webmaster@econlib.org if you have other concerns or suggestions.–Econlib Ed.]

Mar 31 2011 at 12:54pm

Content just as good the second the time, though I did notice the sound quality this time. The first time I had less ambient noise. I’ve heard “double-ending” the recording and splicing can make it sound as if they’re in the same room.

I appreciate how Russ responded to Diane’s idea of breaking up the banks to stimulate competition. He nicely went from “not the best solution” to “horrible solution”. I’m not sure if Coyle just used that as an example to illustrate how difficult it is to do something that is not baked into the political will at the moment or if she really advocates breaking up the banks.

Earlier either she or Russ mentions the barrier to entry cause by heavy banking regulation. So it would seem that the better way to encourage competition is to remove those barriers to entry, rather than force breakups. “The curious task of economics…”

I also appreciate Diane’s observation that innovation to meet regulations is not the same as innovation to meet consumer preferences. Very nice.

I’m looking forward to reading Diane’s book.

human mathematics
Mar 31 2011 at 8:54pm

Minute 15.

Diane, wha’ts the evidence that labour felt involved in the grand progress of capitalism in the industrial era’s early days? My picture of it is quite opposite.

It seems to me like individuals who use computers to amplify their labour are more likely to feel engaged in capitalism. Witness “Hacker News” or any other marker of internet entrepreneurial culture.

Comments are closed.


EconTalk Extra, conversation starters for this podcast episode:

About this week's guest:

About ideas and people mentioned in this podcast:Books:


Podcasts and Blogs:



Podcast Episode Highlights
0:36Intro. [Recording date: March 11, 2011.] [N.B. there are some missing words noted with question marks in the Highlights below. If you have corrections, please email them to webmaster@econlib.org. Thanks!] Book discusses the major challenges facing the world right now. They are economic and some not so involve economics. What are those challenges and what are we going to do about them? The trigger for writing the book and so many books recently was the financial crisis, which was a real shock to me and to many other people. The moment I was most appalled about what was going on was when I listened to the news about the interbank markets drying up, and I thought: payment system might stop working, too, if the banks don't trust each other; I'd better get all the cash I possibly can. For economists, you've got that point, pretty serious crisis. Another pretty serious crisis, too: we have the issue of climate change, and the science there is contested, but I think scientific opinion is that it's a pretty serious problem, but disagreement about what to do about it. There are crises related to our [?] as well, particularly in the United States and United Kingdom as well, inequality--a lot of people arguing that it's got to a quite extreme point and socially unsustainable. We've got a financial crisis that's linked to the [?] societies--promised to pay pensions, welfare, public support and services, aging populations. This is an area where the United States isn't so badly off as in other Western economies, but in countries like Germany for example, the fiscal position is completely unsustainable. That debt just isn't spoken about. As I pondered these questions, going to the cash machines trying to get out as much as I could from the ATM machines at the time, I thought I was actually [?] a common link between all of them, which was we'd badly gone wrong in how we weighed up benefits today and benefits tomorrow; we weren't as good at thinking about the long term as we ought to be, and evaluating how serious [?] might be over a much longer time frame. That then takes you into questions of politics as well. I guess I'd say this is a book of political economy rather than straight economics. That central issue: let's talk about that as a starter, this worry that I think many people have that we don't pay enough attention to the future and we focus too much on the present. I have four children. Do you have children? I've got two. So, I think about them a lot, as a parent; I focus a lot on where they are going to end up in their life--something I have very little control over, but a little bit. I run my life thinking about them in the decisions I make, what to do with my money, what jobs to take. Children play a huge role in my life and I suspect in most parents' lives. I don't think anybody would call my decision-making myopic, short-sighted, live for the moment. Now, having children changed me; but folks with children tend to look forward, a lot. And yet, in some areas of our lives we don't do that. One of those is public policy. We don't seem to do such a good job in public policy looking forward. Do you see this problem as a personal problem or a structural problem with how incentives--either for politicians or business-people who have been set up--how do you see this problem that you are worried about the future? What's causing it? I think it's a structural problem, because, as you say, many of us as parents think about the future, and we actually go to some length to plan our affairs: we educate our children, plan for the future in that sense. I think it's not an individual issue but a structural problem. I think it's partly a question of looking [?] the implications of some decisions, and the issue of social security, pensions, welfare in European countries is an example of that. I'm not aware of any government that actually [?] on publishing the figures of what its obligations to future generations are. They are very large numbers. For the United States, Larry Kotlikoff estimated $200 trillion--very large numbers that put into the shade the actual figures that we look at in the published statistics. I think that measuring some kind of national balance sheet is actually a really important step on the way to framing a longer term perspective of public policy. In a sense I think politicians need some ammunition to help them make longer term decisions, because the short term pressures are so intense--the pressures of partisan politics, which on the one hand is a terrific thing because it's part of the vibrancy of democracy, but on the other hand it puts a lot of weight on satisfying short-term interest groups, as [?] famously put in his work. There's also the relentless pressure of the media in the every-minute communication age. Really difficult in public life to have a long-term perspective. I think measuring better and publishing statistics is a really part of the ammunition to start chipping away at that.
7:03That's one of your themes in the book--the importance of measurement and what we measure. What's troubling is that, as you point out, there are a lot of public voices that have exposed some of the hidden costs we are going to face. There's a few of them--social security, retirement promises, health promises, in the United States it's Medicare. There are public pensions, which are increasingly here in the news here in the United States in March of 2011, so a lot of public employees have been promised fixed amounts of money--some rise with inflation with fixed costs of living--and not enough money has been set aside. So, that number is alleged to be in the trillions, down the road. There are the promises we have made of debt, to pay back future creditors from loans we have taken out in the present. There appears to be a train wreck coming, a really bad train wreck, of promises not able to be kept. One way to present that, as you suggest, is to publish what the promises are. But we do kind of know about them. So, I wonder if the problem isn't more the unpleasantness, to put off to tomorrow what we think we might be able to. I'm sure that's [?]--it's kind of human nature, isn't it, that problems do have to be pressing and quite serious for people to do anything about them. If you think about the financial crisis and how serious that was, in a way you could argue that British and English law has changed despite the intensity of the crisis. So I do think that's true. But I've been wondering also about this as well in the book: the sort of public morality, the shared values and shared commitments to society, and I look back often to the Victorians and how they thought about the future. I travel a lot to Manchester here in the United Kingdom--it's a city whose heyday was in the Victorian era--and it's a great example of the way that people who built a generation's worth, two generations' worth of dynamic economic growth at the same time thought about their legacy a hundred years from now. The buildings, the sewer systems, railway systems, the infrastructure they put in place, we've been living on it every since. I've sort of given up the habit of thinking about the permanence of ours society's progress and what legacy we're going to leave for future generations. I had a podcast guest on--Matt Ridley--a few months back. He made the observation that it's rather bizarre to think about what generations 50 and 100 years from now. Yes, there are certain responsibilities that are a good idea, but those Manchesterians--is that what we call them? Mancunians. For American economist name Greg Mankiw must be a very strange thing to think about Mancunians as being not people in favor of a Pigovian tax on carbon but rather from the city of Manchester. Mancunians did provide some things that fortunately we are still able to use. But they of course had no idea what our lives would be like. So one view says it's really preposterous, maybe even hubris, to think we can plan for the future at that level. But certainly there is planning that's a good idea. I would say one of the most basic things we should plan to do is not to be irresponsible. That would seem to be a modest level of planning that we are not doing a very good job on. The definition I like of the minimum ambition is making sure the next generation to come along can be at least as well off in its living standards and quality of life as your generation. In other words, not eating the capital that makes the economy tick. Going to be interesting to see if we've done that. I hate to say "we." There is no coordinated activity, just emergent phenomena that may burden or help the next generation.
11:55Want to go back to something you said a minute ago, another theme of the book, which is the issue of social fabric, trust, and so on. Another way to think about this is culture, not in the sense of the arts, but what we think of as corporate culture, family culture, what it means to be a good citizen, a good neighbor. I want to make a claim that Adam Smith believed that capitalism made us better people. I don't think that view is widely held any more. I still believe in it, and I would argue that much of what we see as the breakdown of trust and responsibility, an increase in corruption and pursuit of self-interest, is coming from bad public policy rather than inherent to the world of commerce. What do you think of that claim? I too am a tremendous fan of capitalism. I do think capitalism works well in the context of a certain kind of society, and I think we've seen plenty of examples around the world of countries where capitalism was introduced without the benefits of freedom, and the consequences of living standards we've seen in the West. A great experiments in that respect, which will prove or disprove a lot of theories, is Communist China: we'll see whether capitalism can work without the fabric of [?] society. But having said that, I think the sense of progress and shared effort that characterize capitalism in its early days helped deliver the growth and freedoms we all enjoy now, and that's the kind of thing that has started to corrode a bit, I think. If you are looking at public policy in that, while it's hard to disentangle, I think it's hard to argue now that certain welfare systems that many Western economies have had have actually damaged the very people they are trying to help. They've trapped people in certain places without the ability to connect to the labor market, and better their lives and their children. I don't think that even on the left side of politics there is a lot of serious dispute about that now. I think about your remarks about the Victorians. I want to bring it to the financial crisis and get your take on this idea, which is: Wall Street, right now in America--and I'd be interested in British perspective, London financial markets, if there's a similar feeling--Americans look at Wall Street and see it as a very unhealthy culture, very materialistic, no regard for the wellbeing of the people who are allegedly being served. So, this relentless pursuit of profit, which encouraged the creation of mortgage-backed securities, the derivatives based on them; and led to this frenzy of maniacal investing that just collapsed ultimately, with horrible costs for everyone other than on Wall Street. So, I think Americans look at that and say: This is capitalism run amok. My counter to that is that in the 1980s, 1970s, 1960s, and even into the 1990s a little bit, when private banks were partnerships, they didn't act like that. There was a very different ethos among those folks. When they went public and could play with other people's money they became more reckless. And when the other people's money they were playing with turned out to be taxpayer money, it's not surprising that they were particularly reckless. What I'm wondering is: that culture, I think, is endogenous. Do you think that's true in the United Kingdom? Do you think this story I'm telling has any merit in terms of the endogeneity? I think so. I think it's a bit more complicated, so let me explain. There's certainly the same sense among the general public, that greed has run amok in the city of London as well. They see people whose banks are owned by the taxpayer or majority-owned by the taxpayer, paying themselves multi-million pound bonuses. This is a time when the Bank of England is still subsidizing the funding costs of the banking system, to the tune of one hundred billion pounds a year; and the banks made a 40-billion pound profit. In spite of the massive subsidy, they still are not making a profit, and they are awarding themselves for supposed success. In a context with quite severe spending cuts, with public services and jobs going in the public sector, there is complete outrage. People think capitalism has gone wrong. I think it has more to do with that, on the one hand the [?] banks are weak and on the other hand, there's not enough competition in many financial markets, retail and wholesale. So people who run banks have been able to extract economic rent from their shareholders and their customers, and now the taxpayers as well. So, I would argue that there's nothing like a free market, a healthy free market, in the banking system; and that's what has to be addressed. The point you raised about ownership structures is very interesting. If we had very strong governance on behalf of shareholders, that then the public ownership wouldn't matter so much. But I think if we don't have strong governance, then a partnership is actually a much better structure for the activities of risk-taking by banks. I think that's a neglected aspect of the crisis, because it preceded the crisis; but I think it sowed the seeds. My claim, which is merely consistent with the facts, not a proof, is that the growth in publically traded investment banks is a response to the bailouts we saw in the United States, starting around 1984 with Continental Illinois through the Mexican crisis in 1995, the savings and loan crisis, and I think a lot of investment banks realized they could tap into that expectation of credit or bailout. That's a speculation without much evidence. I think I'd agree with your speculation. In effect, we're saying that moral hazard is a much more serious problem than has been realized with these crises as they unfolded. It's that word "moral" coming back into the debate again. Funny word in that phrase but it does suggest something more fundamental going wrong.
19:36In the United States, one of the sources of that outrage that you mention in the United Kingdom is sometimes called the revolving door. A lot of people from investment banks end up sprinkled throughout the regulatory structure: the decision-making structure of the Treasury and the Federal Reserve. And it's a very unhealthy synergy, in my opinion and in most people's opinion. Of course, those are people who understand how markets work, supposedly, so it's natural that they would move back and forth between regulatory and investment bank activity. But I find it very disturbing. An example I always refer to, is, I think it was the week or two before the AIG bailout, rescue, Hank Paulson, the Secretary of the Treasury, spoke with Larry Blankfein and the Chief Executive Officer (CEO) of Goldman Sachs--who was his successor as CEO--and they talked 24 times on the phone. They didn't talk about their kids and summer activities. They talked about probably what AIG meant to Goldman Sachs, or maybe to the world, but to the perspective of Blankfein they were sort of similar. So, one of the things I think people are really upset about is the political influence of the investment banks. Is there a similar problem in the United Kingdom, and similar outrage? I think it's certainly similar in the sense that the financial aid to the [?] people, and they all know each other. I think it's really hard for regulators to actually capture all the information that they would have needed anyway to understand what was really going on. It was a really quite rare individual who had spotted it, exactly what the problem was in the build-up to the crisis and therefore could diagnose exactly what steps to take. Even afterwards, there were a wide range of explanations, so hard to pin the blame on any single one of them. Since, with the regulators as well, even though I don't agree they have been too close to the banking industry, I do have some sensitivity [?] to the task. If the board for the banks, the non-executive directors for the banks, didn't know what was going on, then it's hard for an external body to have access to information they would have needed to file. That, too, puts the emphasis back on the way that you conduct your own business and how genuinely you think you need to serve your shareholders and customers. When I've spoken to the current, eminent senior bankers in London who are now dignified chairmen, so that the prime of their career in the banking industry was in the 1970s and 1980s, they have been quite horrified and embarrassed about the way they see their successors behaving. The problem I have with that--the sympathy thing--and I don't mean to suggest, though I have been very critical on this program about the behavior of people like Hank Paulson and Ben Bernanke; it's of course easy to sit in this chair in Fairfax, VA and take potshots at them; they were scared. I don't think they malevolently sat around thinking of ways to exploit taxpayers. I think they were genuinely scared. But I think the issue is: Who has got the incentive to be prudent? Politicians and regulators will never have that incentive, because it's not their money. It should be. We should try to create a system where the banks have the incentive to be prudent because they are the ones closest to the information and the money. When you have a system where that's not true, you should expect nothing but disaster. So although I'm sympathetic at some kind of personal level--I don't think Hank Paulson or Ben Bernanke or Alan Greenspan are malevolent, evil people--I think the system didn't give them an incentive to be careful. I would also go back to the competition point. A lot of people are kind of scared of competition; they don't see the point of it. I spent 8 years on the Competition Authority in the United Kingdom and people would say to me: Well, we don't want competition in health care; we just want what we have to work. They don't understand the dynamic effect of competition in serving customers and encouraging innovation. If you think about the innovation in some areas and lack of it in others, in banking it's quite revealing, because all of the innovation that I can see--and people say it's an innovative industry--was in creating complexity and instruments that didn't really have any purpose to serve customers. It was all for the purpose of the industry itself. And I contrast that with a mobile service in Kenya, where a mobile phone company was able to persuade the banking authorities that it could offer, in effect, a kind of banking scheme on mobile phones. And there's a very large portion of the Kenyan population which people see have not accepted commercial services at all can transfer money, pay their bills, pay in shops, by insurance, through text messages on their mobiles, which is a fantastic customer-[?] innovation. We can't do it in the United Kingdom. The banks that are doing mobile services, are essentially offering the same services to the customers that they already have through a different means, but they don't actually innovate it to serve their customers. That's a great example. And when you talk about the alleged innovation--which I'm ashamed to say I defended before I thought more about it and understood it better, because it does look innovative, the financial instruments, the mortgage-backed securities--and of course there are many mainstream and thoughtful people, at least seemingly thoughtful people, who: What is to go back? We've got to have that again! There are people who defend that innovation, but as you point out, securitization, which is very clever, was mainly used as a way to comply with regulatory strictures and yet still make a lot of money. Which is what I'd expect them to do; not surprising. But we shouldn't glorify it as innovation that serves the customer. On the contrary, in mortgages, people couldn't afford them; so it was disserving customers. It reminds me of the innovation of agricultural regulations in the United States. Unbelievably opaque, impossible for an outsider to understand, and mainly designed to serve a very small group of people, make them very rich. Innovation of that kind actually creates barriers to entry. One of the main reasons there are many banks is because compliance with regulations is too high a barrier.
26:44You mentioned, and we talked about this at your previous podcast appearance, the Competition Authority. Is that the equivalent in the United Kingdom of the Antitrust Division in the United States? What does it do? At the moment we have two. We have the Office of Fair Trading, which is a gatekeeper authority, refers serious issues to the Competition Commission, which puts together panels of 5 members. Are there innovations in policy that you think are being missed that might make competition occur more naturally? There's an inquiry into the banking industry taking place in the spring; I would dearly love it to say there should be a full competition assessment in the United Kingdom. I fear that it won't go that far. But I think a competition assessment that looked really at barriers to entry and whether or not [?], if that's possible, that would be my preferred read. Let me ask you a tough personal question, which you are free to duck or divert. A person is on that Competition Committee--just like we have certain regulatory agencies in the United States that deal with similar things; we also of course have legislation that tries to so-called reform the banking system. What kind of pressures do you think those folks are under to do something other than "the right thing"? That is, right now in the United States we've passed something called Dodd-Frank, a bill that is supposed to improve the financial system. The strangest thing about it is: a lot of it is unwritten, going to be written down the road by various agencies. Of course, those agencies, the people are going to be paying a lot of attention when that gets written are the banks. Most of us, the regular folk, are not going to be paying any attention. "Oh, that bill already passed." I wouldn't be optimistic about how that's going to turn out, just on incentive grounds. Then I ask, how does that process actually work? I don't think the people on the commission get a phone call that says: I'm with such-and-such bank; do what's good for me and there will be a check in the mail. So, that doesn't happen. There isn't bribery. But there must be subtle forms of pressure that take place. Do you have any thoughts on that? I think the biggest pressure is the fear of saying something radical, actually. Or recommending something that seems just an extraordinarily dramatic step to take given where we are starting from. So, one possible solution to my problem of banks having too much monopoly power would be to say they are too big; should have smaller banks. We have four High Street, London [?] profit takers; through a process of mergers over 25 years, those mergers [?]. We need 6, 8 High Street banks instead. That's quite a radical thing for anyone to say. I can actually [?] with a lot of confidence. So maybe when [?] that a competition body ought to be able to say that. But I think that's the hard step to take. Right, and if somebody put forward such a proposal, the same thing would happen in the United States. People would say that's un-American. It might be! I'm not sure I'm in favor of it. I'm just thinking of what the--I'm not in favor of that being the best way to solve the problem. But if we are going to keep bailing out banks with taxpayer money, that might be what economists would call a second-best solution. It's a horrible solution, but it beats the alternative. There would be a lot of intellectual and personal pressure: This is too radical, too risky. You can anticipate the banks saying that; you would expect that. But I think the very hard thing would be not-so-very smart people would write in the Wall Street Journal and the Financial Times how stupid you were. Bruce Yandle's bootlegger and Baptist theory: the idea that we have both good motives and selfish motives for what we do, and often we do the selfish thing but we justify it with the non-selfish thing. Applies at the personal level. So, you advocate for the banks--but you couldn't look yourself in the mirror if you advocate for the banks--so you say it's because it's bad for capitalism or whatever. You find an altruistic reason to explain why you are doing it. Deep down, maybe you are doing it because the banks are going to be nice to you when you are done. That's the ugly part of it. It feels very flattering to be part of this elite and to be one of the club, so if you start to meet people socially and they look like they respect you and like you and you are invited to all the posh conferences, then it's a little harder to back away from. I think that's a huge part of it. I've suggested--can't prove it, just a claim--for example, if you are not an interventionist, you don't get to hang out with all the interveners. They are not going to invite you to all the parties. Huge corruption implicit in our profession, which is: if you want to play, you have to be in favor of the game. To say it's a bad game, that the government ought to be out of these things--you don't get invited to anything. You are not on the team.
33:04Cheerier subject. Let's talk about the debt issues. One of the things that makes Diane's book so different and enjoyable is that she's extremely thoughtful, as you can tell from listening to her. But she's even thoughtful in print. I have some guests who are very reasonable when you talk to them, but in their books they say very different things. This is a case where there is a co-incidence between the two. In your book you have thoughtful things to say about debt, and all these issues; you go through viewpoints and you let the reader hear different sides. What are some of the scenarios that might play out about public debt and where we might have to end up? Where do you think we are headed and what might be done to get us to a good place? That becomes a problem if the economy doesn't grow fast enough that there will be enough to pay it in the future. So, one pessimistic scenario is that the only way to prevent countries like ours getting tracked off by that, where the real interest rate is high enough where it just keeps building up and never shrinks, is by very dramatic cuts in government spending or by increases in taxation. And that of course is what the U.K. government is doing. [More to come]

More EconTalk Episodes