Jeffrey Sachs on the Crisis, the Recovery, and the Future
Apr 15 2013

Jeffrey Sachs of Columbia University and author of The Price of Civilization talks with EconTalk host Russ Roberts about the state of the American economy. Sachs sees the current malaise as a chronic problem rather than a short-term challenge caused by the business cycle. He lists a whole host of issues he thinks policymakers need to deal with including the environment, inequality, and infrastructure. He disagrees with the Keynesian prescriptions for stimulating the economy and believes that the federal government budget deficits are a serious problem. The conversation closes with a discussion of the state of economics.

Anat Admati on the Financial Crisis of 2008
Anat Admati of Stanford's Graduate School of Business talks with EconTalk host Russ Roberts about the financial crisis of 2008, the lessons she has learned, and how it has changed her view of economics, finance, and her career.
Jeffrey Sachs on the Millennium Villages Project
Jeffrey Sachs of Columbia University and the Millennium Villages Project talks with EconTalk host about poverty in Africa and the efforts of the Millennium Villages Project to fight hunger, disease, and illiteracy. The project tries to achieve the Millennium Development...
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.


Apr 15 2013 at 12:30pm

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

Apr 15 2013 at 1:07pm

While I haven’t finished yet, I have to say that I’m disappointed that Mr Sachs talks about earnings and wage stagnation without mentioning rocketing compensation rates, a figure that only departs from marginal labor product in the mid-2000’s when the Bubble took off.

Apr 15 2013 at 2:03pm

“about Finland’s kind of self-realization that they were at the top of the world’s charts on these Program for International Student Assessment (PISA), international standards tests. And they don’t even test there

Having lived all my life in Finland and finishing school only 10 years ago, I can say this is simply not true. It seems to be some sort of common knowledge on the other side of the Atlantic because it gets repeated so often.

The source of this rumor is probably the lack of standardized tests. We have a national test at the end of high school (which to an extent determines entrance to further education, so it’s not unimportant). Prior to that the only standardized tests are made by the government to sample how schools compare to each other. Not many schools take part in them (I for one never participated in one). But we do have tests made by the teacher, starting in 3rd grade or so. In high school we had one at the end of each course, which means around 5 tests every 6 weeks.

Teachers have their unions, but they are relatively accountable and can get fired.

Nice to hear that they have something good going on in Germany, but in here the system sounds more American in regard to apprenticeships and we have a rather high youth unemployment rate. Though it probably has a lot to do with the very stiff labor market.

John Berg
Apr 15 2013 at 3:01pm

Though I watch Dr. Robert’s “brush strokes” to learn his teaching techniques, I find this podcast excellent in spite of missing whether Dr. Robert is using the socratic method or simply interviewing.

My opinion of Dr. Sach’s improved towards the end as he was forced into more specific details. I was reminded of my favorite eatery which has a marquee to list attractions like “Special of BBQ ribs,” or “Ground Beef, Gravy over Mashed potatos” was finally affected by “Obamaspeak.” This week it simply said, “Your favorite sandwich.”

John Berg

Apr 15 2013 at 3:33pm


Great interview! As a libertarian I completely disagree with Sachs on many things, however I am shocked that from coming from a total different view point and ideology he agrees with us on a few things (spending, asset bubbles, macro, etc). I will have to give this another listen and think about it some more. I agree with John that my attitude towards Sach’s has improved. As always, Russ, econtalk is of great educational value.

Patrick R. Sullivan
Apr 15 2013 at 3:38pm

…our absolutely insane policy of locking up a whole generation of young minority men, which has led to this incarceration boom which is breaking our society, especially in African American communities. The great problems of broken schools, gangs, neighborhoods that don’t function….

Isn’t there something obviously contradictory here?

It’s the ‘incarceration boom’ ‘breaking our society’, but not the dysfunctional neighborhoods with gangs?

Isn’t incarceration a way to minimize the gangs? Wouldn’t getting gang members out of the schools be good for the kids who want to learn? And, what has happened to crime rates since we have had this incarceration boom?

Richard W. Fulmer
Apr 15 2013 at 3:43pm

Jeffery Sachs wants government involved in solving the country’s infrastructure, education, and environmental problems that, he claims, the free market will not address. Yet, the government has been heavily involved in all of these areas and has made them worse.

Take global warming as just one example. The government’s response has been corn-based ethanol, solar power, and wind power. Each of these “solutions” has arguably made the problem worse. Growing more corn required that more land be placed under the plow. Not only were trees cut down to make way for more farm land, but CO2 that had been sequestered in the soil was released when the land was plowed.

A number of studies suggest that more energy is required to manufacture, transport, install, and maintain wind turbines and solar panels than they will generate during their effective life spans.

Meanwhile, the country’s CO2 emissions have fallen – in part due to the poor economy and in part due to the market-led switch from coal to natural gas.

Apr 15 2013 at 5:24pm

“We have kind of an industrial machine which probably worked in the industrial age, where you churn out kids to 10th grade or 12th grade and then there was a market for them. And that’s not working now.”

During the industrial age the market demanded a certain type of person but as government has gotten more involved in education our schools have found it harder to evolve students to the changing market demand for labor. This is pretty typical in government ran industries. I always hear that the solution to our education issues is just to look at what other countries are doing but perhaps the success of other countries has something to do with designing a system to fit their individual needs. Not sure what works in Finland would work here.

Apr 15 2013 at 5:49pm

Around 44 minutes in Dr. Sachs says

everytime we privatize something we create a lobby

Good thing there aren’t any public sector worker lobbies, nor lobbies for continued or expanded government largess! Massive government “infrastructure” programs of the kind Dr. Sachs favors won’t generate new groups interested in maintaining that new spending, steering it in their direction, nor using those programs to further their “political-economic”aims, no sir; just as long as they’re not privatized!

Apr 15 2013 at 6:05pm

Our education system isn’t working well. Finland’s education system is working well. Finland is nothing like us, and the characteristics here given as (possible) reasons for Finland’s success are precisely those where we are most different.
The lesson? Be more like Finland, I guess? Or, that is, be more like Finland in those ways we are now most unlike Finland? Is this the economist’s analog of the government voting themselves a new people? It’s a plan, at least.

Matt Staples
Apr 15 2013 at 10:26pm

A very educational podcast. Good to hear some disagreement and consensus.

Apr 15 2013 at 11:15pm

Wow this is getting good. Central Planning of the financial system is bad because it does not subsidize HIS desired central planning schemes. And what is the solution to all of our problems? Why more but different central planning of course. But this time the USA should not just centrally plan the financial systems and the education systems, but to go beyond this and resolve youth unemployment by centrally planning the hiring decisions of employers through subsidies. And where is all of this great stuff going on? Why Finland and Germany where else? I wonder if people in the USA know what percentage of people with PHD degrees in Finland are receiving government welfare? It is more than the reported 7.8% unemployment rate in the USA (Really 16%). And they are supposed to be the most prepared technically? I wonder if people who have ever filed expenses for travel realize that in Germany this is considered to taxable income?

Also, on the education discussion, I really tire of hearing the idea that college is so valuable. I went to an extremely expensive technical university and have not gotten much farther (In some cases less far) in the software business than people with degrees from community college. I would really like to hear of a real study that adjusts for variables like not including people with certified professions requiring college degrees and those that failed from college. Until then, the argument is just college propaganda. Furthermore I do not see in my everyday life people getting great jobs from college but do see lots of people in jobs that do not require college degrees struggling to pay huge student debts. And I looked up the “Average Starting Wage” at the business school at my university and they claimed that it is 125K? For who? all the people who graduate with a wage paying job I bet.

Apr 15 2013 at 11:34pm

This was a very interesting Econtalk episode. At points I found myself agreeing with Sachs, and others wondering how he held such views. Clearly, he believes in intervention, and yet it seemed that Russ offered several times to say “what is your solution” and his reply was more or less “you raise a good point there” or “I agree with you…” Essentially, he has his talking points and appears to stick close to them.

One point of interest was his view on climate change. Clearly he agreed the ethanol subsidies were a waste, but yet held that climate change is a real problem and that we must take action. What action? Who knows. Russ was right raise the issue of the flat temperatures over the past 15+ years and to press him on the point:

Russ: Do you think we have any precision about what the average global temperature will be in, say, 50 years? Guest: I think we have enough reason to believe that the increases will be so significant…

However, despite all his talking points about Super Storm Sandy, the Russian Drought, and others which have been well explained as “normal” weather, he persists in his view we must intervene.

I’m not trying to make this a post on climate change, but more on the accuracy of the models that we’re using to predict the future. Basically, as in economics or medicine, the models are highly suspect.

This article in the Economist explained it quite well:

The mismatch might mean that—for some unexplained reason—there has been a temporary lag between more carbon dioxide and higher temperatures in 2000-10. Or it might be that the 1990s, when temperatures were rising fast, was the anomalous period. Or, as an increasing body of research is suggesting, it may be that the climate is responding to higher concentrations of carbon dioxide in ways that had not been properly understood before.

Or, more recently the RealClimate blog noted:

The CMIP5 multi-model ensemble can therefore not be used as a probability forecast for future climate. We have to present the useful climate information in climate model ensembles in other ways until these problems have been resolved.

And, climate science seems to be filled with the same issues of all other areas of science: bias… cherry picking data… and questionable mathematics or other methods.

For example, a recent paper chose to exclude data “ex post” (a term I did not know prior to listening to Econtalk) rather than “ex ante”. Take a look a the graph:

Science is much easier if you can discard any data that disagrees with your theory, but that does not make it right.

As such, the lesson I’m learning from Econtalk is: Question Everything. Don’t believe the models.

This episode is a case study in avoiding disconfirming data and rationalizing other data that supports the hypothesis. Example:

I also said you have to look at the totality of this evidence, which comes in many, many different directions and for many different kinds of surveys and many different kinds of evidence. And my conclusion, at least, is that the evidence is strong and consistent that we’ve had a significant structural change, a widening of income inequality, a very particular effect at the top, and a quite significant effect from the median on down.

Apr 16 2013 at 3:04am

How could two economists talk about the calamitous state of human capital for the bottom 80% without mentioning the elephant in the room? Russ almost mentioned it but let it slip away. Sachs seems to want to anticipate it by noting that the Finnish teachers are highly unionized. The elephant is that the primary education system in the U.S. is run by a monopoly union, the NEA. Presumably Dr. Sachs is not the rare economist who believes monopolies do no harm. Is the NEA interested in Dr. Sachs’s reforms, or any others? I don’t get that impression. The NEA wants higher pay, better benefits, and bullet-proof security for its members, period full stop. Dysfunctional inner-city schools contribute hugely to the pathologies—including the high incarceration rates–Professor Sachs laments.

Apr 16 2013 at 8:00am

This guest has talked around all the issues without any convincing arguments supporting his points. In addition he is wrong on the man made global warming front. Global warming is strictly a solar phenomena unrelated to man made carbon consumption; droughts, storms, and other seemingly alarming weather events have been with us throughout the course of human history and will continue to affect and impact us as long as our planet is part of this solar system. What is crushing American and world food production is the massive government regulation of agriculture and the environment; we need to move back to free markets,repeal of government regulation and elimination of entitlements.

Hudson Cashdan
Apr 16 2013 at 9:42am

I found the ideas of Jeffrey Sachs to be boring and stale. I wish you would have really drilled down and identified the areas of agreement and difference (the way you did with Stiglitz). A few points:

-Evidence relating to the extent to which Global Warming is causing droughts- if it is doing so at all- will always be reinterpreted to fit the Sachs narrative ex-post. Since there is no precision in these predictions of catastrophe, any predictions should be heavily discounted when crafting public policy. The NOAA/NIDIS just issued a report refuting the link of US droughts to climate change but this will not matter- any weather phenomena, no matter the historical precedent, will be used to support the narrative which will be repeated until it becomes “fact.” Allowing major ecological issues to get co-opted by opportunistic politicians is a disservice to all environmentally-concerned citizens.

-I believe that less than 10% of prisons are privatized (prob a bad thing). I’d suggest Sachs look to the CCPOA, the California public-sector prison workers union that lobbies for the tougher laws that keep the unionized workers busy (and well paid). Instead of only blaming the “privatized” prisons, why not blame the unionized prisons and the politicians who are in bed with them?

-Finland, really? A homogeneous, Scandinavian country ~1/4 the size of the NY Metro area? Anyway, Washington DC spends ~$30K/pupil on education- I wished you would have asked Sachs how he thinks we can spend that better.

Silly Sailor
Apr 16 2013 at 4:15pm

[Comment removed for irrelevance.–Econlib Ed.]

Apr 16 2013 at 4:30pm

The global warming confidence is entirely misplaced.

There’s 1. no supporting data, and 2. no supporting theory.

1. No supporting data. You can’t tell a cycle from a trend with data that’s short compared to the cycle you need to exclude. (The eigenvalues of the discriminating matrix explode. An economist into cycles can easily verify this, in addition to any old math graduate student.) No measurement is good enough to tell you anything. A cycle of course can’t be man caused; and cycles is what we have a long history of having.

So when they talk about trends, they’re talking nonsense, whether rising or falling. It may be going up or down, but nothing says it’s not a plain old cycle.

2. No theory. Physics requires that you solve the Navier Stokes equations, which unfortunately we are not able to solve. (In 3 dimensions flows go to shorter and shorter scales, so no resolution is good enough, and no solution can be done. But you need short scale flows because they act as an ersatz viscosity back on large scale flows. So you have no idea what the atmosphere is going to do, as far as physics is concerned.)

Modellers have no problem – they just solve some other equation, but that’s no longer physics and no longer predicts what will happen.

Each assumption (e.g., “effective viscosity” and a thousand others) is a knob, and knowingly or unknowingly these knobs are adjusted to match past data. This is curve fitting, and has zero predictive power, as if you’d fitted a polynomial to history.

Physics gives you no knobs.

So anyway, no data and no theory. The science is so far from settled that it hasn’t even begun.

The claim is that after aeons of huge cycles, the earth has suddenly developed an instability which will run away into heating. Any instability would have turned up long ago. History shows that the climate opposes perturbations.

The sociology is solid, however. Funding produces the results required to produce more funding.

Doug Tree
Apr 16 2013 at 6:14pm


I’m a PhD student in engineering (not climate science), but I found a number of things misleading or incorrect in your description of climate modeling as I understand it.

First, In order to model climate, you have to do far more than solve the Navier-Stokes equation (for instance NS doesn’t include heat transfer, which is obviously an important part of modeling climate). I think you are grossly oversimplifying the complexity of the work.

That being said, your broader point seems to be that the “physics” can’t be exactly solved, so the rest of the science must be bunk (just empirical data-fitting). First, much of the physics can be “solved”, its just solved numerically. (We can solve NS on a computer. Companies like Boeing depend on this daily).

The other point is that each assumption essentially amounts to data-fitting. I strongly protest this. Making rational assumptions and deriving simple models that qualitatively or quantitatively describe real systems is the essence of good science. You cannot reject this in climate science and accept it in other fields (like the NS equation, which has many such assumptions).


silly sailor
Apr 16 2013 at 6:47pm

I have an undergraduate degree in microbiology and am currently studying towards a degree in nautical science. I have only studied a little met but I think climate change scientists are falling into the trap of what regularly gets mentioned on econ talk about economics as Scientism. It seems to me when a model doesn’t meet the evidence instead of looking at their hypothesis they come up with a new model. (

This just doesn’t match with the scientific method I learned at university IE
1. Having a problem to explain,
2. Come up with a hypothesis,
3. Come up with an experiment with well defined outcomes to test the hypothesis
4. Evaluate hypothesis based on the results
5. If hypothesis true publish for others to evaluate if not go back to 2

I’m not saying their claims are untrue just their method to determine truth or falsehood are not science.

As to Dr Sachs saying the natural sciences are easier he would see that he would rather Columbia spent more money on the economics than chemistry. Even economists aren’t above rent seeking 😛

Apr 16 2013 at 7:33pm

[Comment removed for rudeness.–Econlib Ed.]

John Berg
Apr 16 2013 at 7:44pm

@Doug Tree

I am curious. When rhhardin refers to a “knob” does he have in mind an analogue computer in which a variable might be represented by an adjustable knob?

Are analogue computers still around?

John Berg

Apr 16 2013 at 7:57pm

@Doug Tree

Its numerical solutions of the Navier Stokes equations that you can’t do, owing to the resolution collapse. 3D flows go to smaller and smaller scales.

The phrase “pushing the envelope” comes from aeronautical engineering, and it counting on approximations near the edge of where they’ve been verified. That is, your numerical solutions with approximations may or may not be right, and you check it out against reality before you count on it.

This does not happen in climate science.

“Knobs” in the model I meant to mean parameters that are thrown in, like “effective viscosity” to represent the momentum transfer of small scale flows that the solution does not solve for. These have to be given some value, and the value chosen is the one that matches historical data. With all the knobs in a modern model, there are a lot of degrees of freedom, and makes it unawares amount to curve fitting.

I did not mean to make climate modelling seem to depend only on the NS equations, but those and data fitting happen to be two things I know about owing to my past checkered career, and appeared to me as obviously misrepresented complete obstacles to what AGW claims to know.

Add the thermodynamics of the air and the oceans and plant life changes, and impossible becomes more impossible, but I’d be merely hand waving there.

Kount von Numbacrunch
Apr 16 2013 at 9:09pm

[Comment removed for rudeness.–Econlib Ed.]

Apr 16 2013 at 9:44pm

When Mr. Sachs got to the point where he called me and many other well read, well studied, knowledgeable people something akin to stupid because we no longer buy into the global warming clap-trap, I could listen no more.

When someone tries to sway me to their point of view through reason I’ll respectfully listen. Not when I’m insulted.

I sure hope up never invite Mr. Sachs to another podcast … it’ll only make you smaller.

Doug Tree
Apr 17 2013 at 12:40am


I really can’t speak to the “resolution collapse” idea. But I would certainly believe that a full solution of of the NS equation on the scale of the planet is impossible given current computational and methodological constraints. These so-called direct numerical simulations are non-trivial, especially with high Reynolds number flows. At the fluid dynamics meeting I went to this fall, I saw computations with max Re near 10 000.

That bring said, I am more interested in the idea of a model that you addressed. I too am very wary of models with many degrees of freedom. I think the goal should be the construction of a relatively simple model that captures the essence of the physical phenomena. This of course requires assumptions, many of which may be questionable. I find it rather unsatisfying however to reject a useful model just because the assumptions are Questionable. Anyone can pick on assumptions. It’s a question of whether they are really crucial to the physics of the problem that really matters.

All that said, I am agnostic to the conclusions of climate science. I haven’t looked at the data myself, so am left to take their conclusions on faith alone, and I do so somewhat skeptically. As someone who engages in modeling daily, I am schiizophrenically hypercritical of others methods yet supportive of the field. I’m not so quick to dismiss the work as meaningless however, even given the enormity of the challenge.


Apr 17 2013 at 7:21am

Russ: Not one of your best, but it’s not your fault. I read the transcript rather than listen, so maybe I’m missing some inflections or connotations. I honestly haven’t learned much about Sachs here. He disagrees with much of the current policy prescription, but other than a vague notion he’d like different government intervention, I don’t know what he has in mind. And he’s not telling in this interview. I presume it has much to do with the mythical panacea of “green jobs.”

On that annoying climate subject:
As you noted, there isn’t much, if any, warming outside of normal variability. Cherry picking surface temperatures and averaging them over large geographic areas to create ‘the hottest years on record’ doesn’t meet the test.

Actual measurements of the troposphere (where the hypothesis predicts the warming should occur) demonstrate no warming. There doesn’t seem to be any OBJECTIVE CLIMATE DATA to support the Anthropogenic Global Warming Hypothesis. That’s why we keep hearing about the computer models and the polar bears.

Sachs wants to impose his (mostly undiscussed) policy preferences based on an unproven hypothesis, and wants to treat symptoms of societal failures rather than the root causes. As many noted above, disintegration of traditional families is responsible for many of the negative outcomes in school and life generally (and the subsequent statistical changes you noted). And the teachers’ unions that lobby against performance, and thus against the children’s’ interest certainly don’t help matters.

Sachs also appears uninterested in spending cuts as an alternative in the public debt discussion.

Looking forward to next week’s podcast.
Thanks Russ.

[spelling error fixed per commenter request–Econlib Ed.]

Lauren [Econlib Editor]
Apr 17 2013 at 8:41am

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Apr 17 2013 at 9:41am

Green House gas absorbs energy from the sun, making it cooler during the day, and releases it at night, like a Green House. This is why deserts are really hot during the day, and very cold at night.

John Berg
Apr 17 2013 at 11:47am

The crux of this podcast is from approx. 50:00 on.

The discussion addresses three specific issues:

What functions should be performed by government at all, what at the federal level, and what at the state level.

We have government at two levels in our federal form of republic: state and federal. A US citizen must decide at what level to assign specific powers or functions of government. Certainly a US citizen acknowledges no government at the UN level.

I have the sense that Dr. Sachs has obligations to the UN because he gets his funding from them. I understand we make treaties with with other equal sovereign states and these treaties become part of the Constitution. Does anyone believe we can cede part of our sovereignty to the UN?

John Berg

Apr 17 2013 at 12:21pm

The power to make treaties is derived from the Constitution. Any treaty that violates the Constitution is thus invalid. Just as the power to make gun legislation is derived from the same document that ensures the right to bear arms. That right cannot be abridged without first altering the Constitution and there are rules for that that don’t include executive or legislative fiat.

John Berg
Apr 17 2013 at 12:43pm

Surely our grandchildren’s education debts are part of our economy. At time 55:00 Drs. Sachs and Roberts discuss the inevitable increase in interest rates. We denied our grandchildren bankruptcy with respect to their education debt. Won’t we freeze their interest rate at the present level? Won’t that affect future spending?

In last weeks podcast, we discussed the government ability to “reorder” debts. To whom do we owe what portion of our debt? Can we tell China at what rate we will pay interest? Can we have one rate for US citizens and another for Labor pensions? Can we simply offer to pay the principle without interest forever?

John Berg

Steve Sedio
Apr 17 2013 at 12:59pm

One thing I really love about those concerned with climate change is they seem to think we have a solution that we refuse to accept. We don’t, and we don’t even have a viable breakthrough (requiring 10 years or more to commercialize).

Therefore, the only way to stop producing green house gas in the near future, is to stop any energy production that creates CO2. Productivity would plummet, taking food and the economies of the earth with it. The planets population would drop to pre-industrial revolution levels due to starvation and / or war. (There are those in the green movement that think that is a swell idea.)

The closest thing we had to an immediate solution was low cost solar panels from China, but that ended with our tariff.

Even with solar, because we have no suitable way to store energy, once 25% of the population has zero’ed out their electric bill with solar, our daytime energy needs are met. We would still need power the other 19 hours a day.

We are told we need to spend hundreds of billions on researching alternative energy (the last I saw, only 2% of the GDP), but never quite define what that energy is. I’ll make it simple, we can’t make energy, we can only harvest it, from the sun, from tides, or from nuclear. What we need to research is storage methods, and there is only one storage method worth developing – oil. Squeeze it from algae (my favorite – but there is still lots of problems), or recycled toothpaste. Oil is the only viable energy “source”. It fits into the existing infrastructure. It has the energy density require for air travel. It is easy to transport.

One final shot over the bow – with all this concern about CO2, how come we still recycle paper? Growing more trees to make paper (at less cost then recycling), and sequestering CO2 as paper in land fills can be done immediately. I guess man made global warming isn’t that important.

Doug Tree
Apr 17 2013 at 1:34pm

Albeit tongue-in-cheek, I like Steve’s idea of landfill carbon sequestration. And while I don’t share quite the same fervor, amen to most of his points.

The true problem of climate change is that since the industrial revolution we’ve been replacing human energy with chemical energy, and enriching ourselves in the process. Throwing out that model throws out pretty much everything.

The real silver bullet is *speeding up* the creation of fossil fuels from the CO2 we have in the air. Then we don’t have to worry about putting CO2 there in the first place. It might even become economical to capture and store CO2, if its a valuable commodity to make fossil fuels with.

Of course, this is heading uphill on the energy curve, which is the real sticking point, since we already know how to make synthetic fuels (e.g. Fischer-Tropsch). So the real game is either nuclear or artificial photosynthesis of some kind (solar cell -> electrolysis -> H2 + CO2 into Fishcer-Trospch). Given that reality, I doubt we’ll ever stop burning things. Gasoline is just a much better battery.

Aaron Zierman
Apr 17 2013 at 2:55pm

I agree with Sachs that this seems to be more of a chronic, underlying problem we face economically than just a standard business cycle. I think he is agreeing that it is a problem of reluctant institutions that retrench instead of reforming or dissolving. Where I find myself disagreeing with Sachs is that he seems to also say that the problem of entrenched, unchanging public systems is new, other public systems. Even if they are magically brought perfectly in line with modern needs, will these systems not face the same problem of refusing to change from this point forward?

In my opinion, the educational institution in America is the perfect example (and underlying problem) of this inefficiency and unwillingness to change. I really enjoyed the discussion on the future of education and how it might change. I’m curious what everyone thinks about the effectiveness of online education. I’ve looked into Kahn Academy and personally, I see the future there. It’s certainly some better education than I received through public school, it’s free, it teaches mastery rather than base competence, and can at minimum greatly enhance standard education practices.

What are more thoughts on the potential futures of education (and problems)?

Perhaps a podcast with Salman Khan?

And for Econlib Editor Lauren, thank you for all that you do as editor of this site. I truly appreciate the civil discussion of ideas that you help to promote.

Ken P
Apr 17 2013 at 10:16pm

It was a good discussion and I was glad to see Sachs has the common sense to see that spending money recklessly is not a good thing. IMO, one of the worst aspects of the stimulus from a purely design perspective was using retroactive tax cuts. How are retroactive tax cuts going to incentivize the future?

I agree with Sachs’ point about cherry picking time points for use in global warming trends. Comparing to a peak year (1998) is cherry picking, but so comparing to “instrument history” (which began at the end of the little ice age”. He ignored Russ’ question about the precision with which we can predict 50 years down the road, but insists that we know that it will be much hotter.

My guess is that Russ’ point was not that we are cooling since 1998, but that temperatures are diverging from the hype of alarmist predictions.

Apr 17 2013 at 11:19pm

A greatly appreciated conversation between two people that fundementally disagree, but showed respect and learning from what each said.

Thank you both for what forms the basis for progress.

John Berg
Apr 18 2013 at 8:45am

Since Socrates, good teachers attract good students and a corollary follows: the students learn from each other.

From Steve Sedio and Doug Tree on these pages I learned that oil, loaded with long chains of hydrocarbons, actually provides a battery analog for millions of years of solar energy stored in the Earth. Of course, necessarily I had to add thoughts from my other experience to note the sheer stupidity and irony of current pundits penalizing two or three generations with this nonsense of “global warming by man” when in fact it is mankind that generated the technology that secured the most precious commodity for man: more years of life.

A fundamental task of government rests on preserving the “Commons” and the most important resource to sustain and multiply is the ingenuity of mankind. Water and Air represent life sustaining common assets that we all hold in common but their value is in the additional years they grant.

John Berg

Jason Huber
Apr 18 2013 at 6:00pm

Great podcast!

Jason Huber
Apr 18 2013 at 6:10pm

MichaelM, If you’re talking about CEO compensation, then you’re right. Otherwise, incomes for workers have been stagnant since the 70’s, in complete misalignment with productivity gains.

If you disagree can you please share your source?



Andrew Paes
Apr 19 2013 at 3:30am

Great discsussion. Russ, I was wondering if you would be able to coax, Mark Blyth from Brown, Bill Janeway or even Doug Henwood from the Left Business Review on to the podcast. The more discussion across ideological lines the better.

PJ Vandal
Apr 19 2013 at 7:59am

In the section of the interview where Russ and Dr. Sachs are discussing the reasons why it might not be such a good idea to continue to massively increase U.S. debt, I found myself actually shouting at the podcast.

Russ: …And number two, interest rates–I hear this all the time, and it doesn’t make sense to me, but I’ll let you respond to it–are so low, it’s cheap, it’s almost free, it’s practically free; why are you worrying about it? Guest: Well, if we were financing a long term project at very low interest rates on a long term debt, I think there’s probably an argument there for certain kinds of investment programs…

The gist of Dr. Sachs’ answer is that someday interest rates will likely go up and then we will have to spend a lot of money on debt service. If the U.S. Government were actually borrowing capital and paying ultra-low interest on that capital, then Dr. Sachs answer would at least make sense (whether you agree or disagree). But the real problem, and the reason that the interest rates are so low, is that they are not borrowing capital at all. They are borrowing counterfeit currency that the Fed is creating out of thin air and using to buy government debt.

As the U.S. tax payer is ultimately on the hook for the Fed’s balance sheet, the Fed can rightfully be thought of as monetarily part of the government. So the fact that the interest rates on government borrowing are low is a complete red herring. With the Fed creating currency to buy the debt, the government is not actually borrowing anything. They go through a complicated two-step to make it look like borrowing, but the Fed is buying virtually ALL of the government’s debt with thin-air currency created with a keystroke. The government is financing their activities by debasing the dollar. The process is no different from the Roman empire progressively lowering the silver content of their coins.

Apr 19 2013 at 8:41am

@PJ Vandal
You said” The government is financing their activities by debasing the dollar.”

I would add that the low interest rate discussed in this podcast is an illusion. The government buying its own debts drives down the interest rate, giving the illusion that the market considers the American Government’s debt low risk. What the low interest rate is actually saying is that the American Government considers its own borrowing low risk. The distinction is important because most people, even economists, still think of and use interest rates as if they were still determined by free market equilibriums. Obviously they are not. Free market prices contain enormous amounts of information. Government determined prices—like the current interest rates—are arbitrary and quite nearly meaningless.

Apr 19 2013 at 8:48am

When you see large numbers of people acting on arbitrary and meaningless information, expect large scale miscalibrations—bubbles–to occur.

Take away point: When you see the government alter price signals, expect disaster in the near future…

[You heard it here first.]

Adam Baum
Apr 20 2013 at 12:43am

Why is it that when the grand designs of statists don’t work, they blame the people in charge or say that the implementation is “crude”, blissfully ignorant that any plan has to account for human foolishness.

Apr 20 2013 at 1:18am

It was hard for me not to like Dr Sachs. He seemed a reasonable left wing idealogue who could see some sense in Russ’s classical liberal views yet still hold fast to his belief in governmnet programs. But it is very helpful to come here and read the criticism of Sachs that I knew I would find here. Like how do can we possibly compare tiny simple Finland to the gigantic complexity of the US? Or why do we not criticize the public unions of California for their prison oriented public good? Or how much do we have to spend per student in the inner city before their schools match the productivity of suburban schools. The comments here reinforce my sense that reducing federal government spending and programs would rebound responsibility and resources back to state and local governments and communities and the markets, allowing them to devise more and better bottom up solutions to problems mentioned in this interview.

Michael G Heller
Apr 20 2013 at 9:15am

It was another great podcast. I listened to it yesterday, and then wrote about it at Project Syndicate today. I think Paul Krugman was also listening in. He went out of his way precisely to reverse the central thesis at the NYT: “my hard-line views on policy in the current crisis — it’s a demand problem not a structural problem”. Sachs wins this one.

Apr 20 2013 at 12:22pm

I enjoyed the podcast.

I’d be interested to hear what Sachs believes are ‘small measures now that are in conformity with the very strong knowledge and inferences that we have available’ to address climate change (I believe that is what it is called now).

From my understanding, the models only attribute a portion of climate change to humanity — and we know that correlation is not necessarily causation. It seems like the more practical approach is to assume climate change is and will happen, as it has in the past, and let humans find ways to adapt to it, as they have in the past.

The other is that it just seems that Sachs takes a ‘black box’ macro view of a lot of things. He sees them as systems and structures, instead of people interacting with each other.

For example, I’d be curious to know more about why he thinks we have so many people locked up. He seemed to agree with Russ about the war on drugs, but he also mentions private prisons having a profit incentive to have more prisoners. He doesn’t mention individual behavior — as in, it is relatively easy to stay out of prison if you generally abide by the law.

Apr 20 2013 at 6:47pm

This was a very poor interview, and I found it frustrating to listen to.

The guest was clearly very knowledgeable and had a distinct and interesting point of view, but Professor Roberts just had him rattling off statistics and asserting that things like global warming, or budget deficits were huge problems to our economy without actually explaining how or why. I couldn’t figure out what economic theories, if any, the guest was operating under.

The worst thing about the discussion was that it was completely ahistorical. Was the world perfect before the prison industry or Alan Greenspan or global warming or whatever “structural problem” caused the great recession in 2008? Were there no structural problems before 1973 when median income peaked? On a show that’s supposed to be about economics, how could you have a guest that offhandedly dismisses both Keynesianism and Monetarism without asking him what he thinks might have caused the Great Depression?

Anyway, I’m a big fan of Econtalk, and I was very interested initially in a lot of what the guest was saying, but by the end I was totally exasperated by this interview. Prof Roberts ought to call Dr. Sachs back and have a do-over.

Apr 21 2013 at 6:33pm

I am a frequent listener of EconTalk and appreciate the work that Mr. Roberts puts into his interviews. I am most engaged when he interviews guests that do not share his exact economic ideology, such as the case with this show.

I would like to hear Mr. Roberts inquire more about those differences rather than just rush to the parts they agree on. I know that is more difficult as a host, but there is great value in understanding why other people believe what they do. Respectful discourse is something that we have lost in this country and has led to unbelievable polarization and uncooperation. It also seems that macroeconomic ideologies are prone to dogmatism because they can never be proven absolutely right or wrong. The most realistic solutions to the problems facing our country and the world are likely a combination of differing methods.

I would encourage Mr. Roberts to continue to seek scholars with differing viewpoints that expose us to a variety of ideas and not just virtues of Hayek or libertarianism. Respectfully understanding a diversity of economic ideas is what is required for thoughtful dialogue and solutions.

Apr 22 2013 at 2:10pm

I liked this podcast a lot. I’m kind of tired of discussions about austrianism, hayek etc. I’d very much like to hear more guests with different opinions and also more non-economists.

Pat Sweetnam
May 2 2013 at 7:48am

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

Don Freed
May 3 2013 at 12:58am

A recent article in Geophysical Research Letters argues that Russ was correct on the climate. Global warming has been occurring at a rapid rate for the past decade but air temperature has not been rising as the deep water of the worlds’ oceans absorbs most of the heat.

Russ Wood
May 6 2013 at 5:06pm

Prof. Roberts, I enjoyed the interview, though it seemed that Prof. Sachs got a bit too much leeway with his broad generalizations.

More to the point, while I understand that your purpose is not to debate your guests on Econtalk, Prof. Sachs got away with an assertion that should be met with push-back on as a categorical matter. He made the (valid) point that privatizing prisons created an interest group to defend and expand privatization. I suggest that you record a question, invocable by a big red button to be used whenever such a statement arises: “Do you really think that providing such services through government DOESN’T create an interest group that lobbies for its interests?”

Henry Bowman
May 10 2013 at 5:40pm

I find EconTalk to be one of the most interesting podcasts available. I download them onto my iPod and listen to them while driving.

That said, I quit listening to this interview when Sachs made the absurd assertion that greenhouse gases were obviously a danger to the planet, or words to that effect. The whole issue of climate change is immensely complicated, and I seriously doubt that Sachs, an economist, has much useful information on the topic. Even if his largely unsupported assertion that greenhouse gases are the main cause of planetary warming is correct, it is hardly clear that this would be a planetary disaster. It might well be an overall positive. This interview is one of only one or two I have quit listening to after deciding that the interviewee’s views were too ideological to be taken very seriously.

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Podcast Episode Highlights
0:33Intro. [Recording date: April 4, 2013.] Russ: Topic is U.S. economy. I'm sure we'll get into a lot of other areas as well. You argue that we face chronic problems, but our solutions that we've been trying are very temporary. What are the chronic problems that you think face the United States and what should we be doing about them? Guest: Really, since the early 1980s we've seen a pretty significant structural change in the U.S. economy. It's been manifested in the changing labor markets, changing patterns of production, trade, finance. And a lot of ecological harms and disasters. And I think that it's when you sum all of that up, one can see that the United States, like the whole world indeed, is experiencing a lot of disruption, a lot of very difficult changes in all aspects of our economic and social life, and we've got a lot of undesirable consequences from that. My point is that we've not been attending to those long-term changes. We have hardly recognized them in our politics or our policies. And as a result of that we've ended up, in recent years, in a pretty deep macroeconomic crisis--high joblessness--a pretty deep social crisis, with very high inequality of income; and a shockingly high amount of poverty in the United States. We've ended up with dysfunctional systems in our economy. The healthcare system is really, compared to most other places in the world, not working. Our energy sector, our infrastructure, really are way off course from what we need. So, my view is that by failing to understand the deeper dynamics that the world, the United States are experiencing, the deeper trends of technology and globalization, and environmental change, we've just gotten farther and farther off track. And our political system seems only to understand the 24 hour news cycle or at best the 2-year election cycle. It doesn't seem to want to focus on these longer-term issues at all. Russ: We only have an hour, so that list of problems that we have was quite lengthy. Let's just take a few of them. What do you think are the most important ones that have been ignored, that you think are at least amenable to policy? Guest: I think the overriding change of the last 30 years has been globalization. But globalization has many different aspects to it. Of course, the world has really come together into one integrated, interconnected system of production, trade, finance, and technology. The introduction of China into the world economy has been probably the single most transformative aspect. But globalization has both enabled and been enabled by the information revolution. And so that has allowed jobs to shift across sectors and across type and across countries. We have a radically changed division of labor within and between economies. The growth of the world economy as a whole that's been made possible by this and by the change of policies has also put huge strains not only on particular sectors of the economy and on income distribution but on the global environment, because China is so large and the rise of the emerging economies is so rapid and so significant, that we also have planetary scale ecological challenges as well. So, I would, in a way, try to maybe a little bit oversimplify it by saying that a fundamental driver is a world economy that at one level has done quite well over 30 years--quite significant economic growth. But the integration of the world economy has meant huge changes in the nature of jobs, technology, and environmental problems. And again, those are the ones that we need to attend to. What we've ended up with is an economy that no longer sustains a middle class, that has huge inequalities between rich and poor, and that hasn't begun to face up to some very, very deep ecological challenges, which hit us the hard way in these superstorms, like Superstorm Sandy last November, or the massive drought that has been hitting the United States in the recent years and doing great damage to the U.S. food supply and the global food supply.
6:24Russ: I want to stop you there. I want to get back to the economy, but you've emphasized a couple of times the ecological issue. And I want to get to that. On the food issue, it seems to me--and I'm happy to hear a different perspective--that the subsidies to the agricultural sector in the United States, particularly the increased encouragement of corn in the production of ethanol, has pushed up prices of many related commodities. That's one side of the commodity price issue. The other side of course is the demand side from growth from China, India, and elsewhere, which has pushed up prices of oil alongside geopolitical events, so it's very hard to disentangle those. But it seems to me that we don't have any kind of food crisis in the United States other than the fact that we have privileged one product in such a distortionary way, with very little environment return. Do you disagree with that? Guest: Well, no, I agree with both your points. The ethanol subsidies are absolutely crazy--except from the political economy point of view. The rising world demand for feed grains and food grains, especially because of China's growth, is a major factor. But on the supply side, globally, and in the United States, we have had an increasingly erratic supply of both the feed and the food grains. Not only the diversion into biofuels, which make no sense--as you rightly point out--but also more and more shocks. Last year because of this megadrought we lost something around a fifth of the soybean production, something comparable in our maize production. We're a central part of the total world food grain and feed grain system. So that was a major shock. In recent years there have been significant droughts in China, which did great damage to their domestic production, forced them big time into the international markets. There were significant crop failures in Russia and Ukraine. So what we're seeing is three phenomena, and I think you name two of them very well. One is a useless diversion of very valuable arable land into the wrong things, both in the United States and Europe, largely driven by lobbies. Second is a rising world demand for every variety of agricultural, and I would add fisheries, outputs. But third is an ecological constraint on the supply side, on the fishery side: we've really topped out the extraction from the oceans and done great damage to a lot of fisheries; on the terrestrial side we have tremendous instability of the feed and food grain supplies right now in a lot of the staple regions because of this phenomenon of the increasing variable, the heat waves, droughts, floods in a lot of places--Australia being increasingly destabilized as well. And so I think it's a combination of all of these factors. But they are all significant. And they are all playing a role and the manifestation of it most directly is very high real prices of these commodities, and of course, high volatility as well. But I think both the mean and the variance--high average prices that we now face and this very high volatility in recent years are reflections of these phenomena. Russ: The only other point I would make--obviously we could spend the whole time on this--is that I'm not a deep student of climate change, but I have noticed that there is murmuring that the last 10 or 15 years have not shown much global warming. And this seems surprising in light of the incredible amount of carbon dioxide being pumped out of China, and elsewhere, as the world has gotten more developed. Guest: I think that's not a right observation, Russ. Russ: Which part? Guest: The fact that the last 10 years have not been consistent with the modeling and with the expectations of climate change. There's a lot of silliness in that oft-repeated observation. The last decade has been the warmest decade in instrument history. What is true is that 1998 was exceptionally warm because it was a very strong El Niño year. So a lot of people that play up this--mainly for propaganda reasons, in my view--say, well look, 1998 was the peak and then if you draw the line from 1998, you just don't see all that much. But what we do see is that if you strip away these seasonal and inter-annual phenomena of the El Niño Southern Oscillation (ENSO) cycle, if you take into account the decadal ocean temperature trends and so forth, what we face right now is very, very clear. And that is a greenhouse gas-driven warming of the planet that is both highly significant, very dangerous, continuing at a rapid rate; and the best of our ability, scientific inference, very frightening to the future, with a lot of instability likely to arise. Russ: Do you think we have any precision about what the average global temperature will be in, say, 50 years? Guest: I think we have enough reason to believe that the increases will be so significant and we're running an experiment not on a small patch of the planet but on the only earth we have, that we have all the reason to take small measures now that are in conformity with the very strong knowledge and inferences that we have available. Russ: Maybe we'll come back to that toward the end. I would rather focus our time, though, on the economy. Guest: But it is part of the economy. Russ: Oh, I understand.
13:24Russ: I want to come to the issues you raised about the U.S. workforce and its relationship to the global economy. I want to challenge you and have you expand on a couple of statements you made earlier. You said the middle class--I forget the exact phrase that you used, it was not a cheerful phrase: dead, gone, dying, missing-- Guest: Shrinking. I don't know what word I used, but let's go with 'shrinking' for our discussion for the moment. Russ: Shrinking What do you mean by that? I don't know what that means. I look at the economy, and the reason I find your work so interesting is that it's very difficult to disentangle the mediocre recovery we are in now from longer-term trends. And there is a temptation to say: We're just having a bad recovery. You are saying: No, no, no; there's something more serious underlying this problem. There's a sea change that's more than just the last couple of years. You are suggesting it goes back two to three decades. What's that sea change that's destroying the middle class? Because I don't see it. I see a sea change for people who didn't finish high school. I think a person who didn't finish high school today has a very different economic path than 50 years ago or 40 years ago or even 30 years ago. But that's a very specific kind of problem. You are saying something much more systemic. Guest: Well, at first a person who finishes high school but doesn't get a bachelor's degree is the median for a young man in our society, so we should keep track of what's a small thing and what's a modal phenomenon. For young people, aged 25-29, bachelor's degree holders constitute about a third of the total--I think it's maybe 35, 36%. That share has not really changed very much for quite a long time. Most of our young people do not get a bachelor's degree. Russ: They attend. More attend, but they don't finish. Guest: More attend, and many, many drop out before they complete the degree. The labor market experience is that the degree is important. The premium on that degree has increased significantly. If you do have a bachelor's degree or above, you are probably doing pretty well in this economy. But that is not the median, and it's far from the norm in our society. If you have a high school diploma or less, well, life is tough. And in many measures, it's gotten considerably tougher. Every measure that one could cite has its own school of debate of exactly what it means and compositional effects and other things to take away, but I would say that the highlights are that for men in particular, and I think there's a reason for that because men have been more exposed to the forces of globalization than women in the economy, who work mainly in the service sector and more often than not in non-tradable sectors. But for men the peak, median, full-time annual earning was in 1973. And one has to acknowledge that by any standard of our business, if you look at that, because our economy has been growing since 1973, pretty significantly and pretty consistently, actually, to see a median earnings of full-time male workers peak 40 years ago is a structural shock, actually. I find it amazing. Very counterintuitive. And very striking. But that's the case. And if you look at many other measures--every one of them flawed, so you have to take the aggregation of them to get a picture, whether it's wage levels or levels of earnings in various occupations--basically, for the middle of the income distribution and on down there's been very little measured progress. I think probably real progress is greater than what's measured. But all of the measured gains are in the top quintile, more or less; and a huge proportion of those are in the top 1%, we know. So we've had a tremendous widening of income inequalities by many, many measures. Top 1%, Gini coefficients, top 10% over bottom 10%, top 20% over bottom 20%--we've seen a lot of evidence of stagnation of earnings for those with high school or less educational completion. We see that the number of jobs within the current recovery, for example, for those with high school and less--there's been no recovery. There's just been a net job loss that had no rebound. The jobs for college grads has continued to grow, and there was a rebound; it was quite significant. So, I think this widening of the income inequality is very real. Sometimes the middle class is measured by proportion of households or workers within some range of the median: plus-minus 50% of the median income, for example. And the share of households within that bound has also declined, pretty markedly. Russ: But those numbers are very distorted by demographic changes--due to divorce, as the number of households changed over the last 30 or 40 years. Household structure has totally been revolutionized because of that increase in divorce rate; the delay in the age of marriage. So I think when you look at those data, you have to be very careful. Guest: Didn't I say that? Russ: Uh, not exactly. Guest: Well, I did. And not only I said that every one of these was--they are a community that debates the fine points, but I also said you have to look at the totality of this evidence, which comes in many, many different directions and for many different kinds of surveys and many different kinds of evidence. And my conclusion, at least, is that the evidence is strong and consistent that we've had a significant structural change, a widening of income inequality, a very particular effect at the top, and a quite significant effect from the median on down. Russ: Well, the question then is: First of all, I don't think the 1973 peak of male earnings is consistent with--as you point out--there is some growth. Maybe it's not zero. Maybe that really wasn't the peak. I think it's grossly out of line with what we see through all kinds of consumption measures and other ways we can look at it, the way the data are collected. Guest: Russ, I would tend to add the following. By the way we actually measure consumption in the national accounts and by the traditional Consumer Price Index (CPI) deflated standards, there you see a peak. What I don't think is right are these consumer price indices. I think inequality of goods, the advances of technology, the fact that we can do things now that literally were not possible 40 years ago don't get into our equality of goods measurements adequately. So, I think there's been progress. But as we actually measure things, no. Then it really did peak. Russ: Yeah, no doubt. Guest: So, that's my point.
22:15Russ: I think the question then is: It's true that the top 1% has done very well. Do you believe there is a causal connection between, say, the top 1%'s success, which has many different components, as we've often remarked on this program--it includes Wall Street executives who I think have been grotesquely subsidized by taxpayer largesse in all kinds of subtle and not-so-subtle ways; there's athletes, entertainers, Chief Executive Officers (CEOs) of large companies that have been very successful and productive, entrepreneurs. A lot of those people have made the world a better place, and I'm thrilled that they are making a lot more money--doesn't bother me at all. But there are others that I think have taken money from the rest of us. But do you think that change in the top 1% has something to do with the fate of those in the middle and below? And I ask that because, although we talked about how hard it is to disentangle trends from temporary changes, when you look at this last recession you see a massive drop in construction employment. Which punishes people with relatively low levels of education. So we see a very tough secular trend downward in manufacturing employment due to globalization and productivity change. Those to me are the things that matter. Do you think the inequality in and of itself is doing something to the middle and the lower groups and the distribution? Guest: Well, I think that you are right to point to globalization and technological change as the main drivers of actually I would say most of this, even the top. And I regard those as very significant structural factors that we've not been paying attention to. That's really my point. So I'm in agreement with that. When it comes to the top, they've been big gainers in globalization; but for, actually, for an interesting variety of reasons. One is that globalization really has been kind to capital in general, whether human capital or financial capital. More outlets for investment, a larger globalization market, having high skills or a great brand or a great ability to sing or to put a ball in a hoop or in a cup has absolutely been aided by globalization. But so, too, has the political power by the top absolutely been enhanced by this as well. They can play governments off against each other. There is a race to the bottom in many ways of who you try to attract, who you appeal to in internationally mobile capital. Our own political system is skewed more to the interests, the views, the wellbeing of that group. And that has absolutely been played out in the way our tax system has evolved, in the absolutely grotesque and fulmant[?] tax abuses that have been permitted. And in the fact that Wall Street has run the White House for the last 15, 20 years. And ended up, as Wall Street does when it's allowed to run things, making a huge mess of things. So I think that there's a political economy aspect to the wealth at the top that goes alongside the economic aspects. The economic aspects are that globalization really does favor mobile capital; it really does favor human capital. It has been very tough for those in the middle and at the bottom because of globalization and the competition in the open sector of our economy. And of course, as you and I both said: Technology has been an underlying driver of globalization itself, and it also a direct part of the income distribution shifts within the United States even aside from globalization. So the summary is: I view it as a pretty complicated morass of basic economic factors combined with political economy. But it's added up to a political system which amplifies these differences rather than leans against the wind. Russ: On a cheerier note, you say it's bad for people at the bottom, but of course, I assume you mean here in the United States. Certainly the average worker in China, India, and a few other places that all have a lot of people, have done extraordinarily well over the last 30 years. Guest: I agree with that. And I would add Brazil as another large economy with big gains. You know, the world economy has done quite well in a lot of ways, and I'm a big fan of globalization. I think it has raised living standards and improved wellbeing. What I'm not a fan of is closing our eyes to the challenges that it leads to as well. And that's really my main point.
28:01Russ: Before we leave that, and I want to turn to some more macroeconomic policy issues, I want to go back to these sectoral issues in manufacturing and housing construction. When people say--it used to be that if you finished high school you led a middle class life, and that's no longer true--I think that's correct. But my response to that is: It used to be if in the late 19th century if you were a blacksmith, you made a good living. And by the early 20th century that was no longer true. Certainly by the middle of the 20th century. People understood that. They had to go get different skills. It's certainly true that the manufacturing sector in the United States used to be a very good outlet for people with low levels of formal schooling. That's a sector that's diminishing. Housing has at least declined temporarily, maybe for a long time. What policy changes need to be put in place, or have to be put in place, if at all, to let the evolution of the job market deal with these technology changes? What do you recommend? Guest: I think you are making a great point and I agree with it. When you have underlying structural changes as we do expect, you expect changes in response. And then you really have to ask the question: Will these take care of themselves? And I think the complication fundamentally comes from the fact that the entire life cycle of human capital, from an early childhood which gives a chance to a young child, up through formal schooling, up through the costs of higher education, have massive breakdowns. And these are breakdowns that have been acknowledged for decades and decades. I think Milton Friedman was probably as eloquent as anybody about the breakdowns of normal market forces for human capital. What I see happening, Russ, is we have increasingly become a tracked society, where a child born into poverty today has a very, very different, very, very difficult mountain to climb if they are going to get out of poverty. The evidence is that most don't make it. And there are many factors in that quote, "within family transmission" of human capital, our absolutely insane policy of locking up a whole generation of young minority men, which has led to this incarceration boom which is breaking our society, especially in African American communities. The great problems of broken schools, gangs, neighborhoods that don't function, kids that by the age of 4 or 5 are not school-ready and never catch up. Jim Heckman's evidence on that is extremely powerful in my view. And then the soaring costs of higher education, which maybe we're going to see a technological breakthrough to get out of with online education--I dearly hope for that. But what we see is very large cohort of young people responding to the market, trying to get ahead and falling short. They go to college for a year or two, take on a lot of debt; and then can't make it. And so now we've got a trillion dollars of student loans, a huge amount of that is going to go into default; it's going to be very painful for a lot of young people who made a year or two of school but couldn't continue. And we haven't solved this whole lifecycle problem of human capital. It used to be easier. Of course, it used to be you weren't aspiring to a $50,000, $100,000 a year job. You were aspiring to be a trained blacksmith, like you said. And that was an easier road to hoe. But now we have very profound challenges of human capital accumulation because we want to live in a sophisticated, high-income society that requires lots of skills and a healthy upbringing and labor-market-friendly capacities. And for a significant part of our population, our young people, it's not happening. And I see that as a huge, probably the biggest investment failure of our time. And also as a social calamity. Russ: Yeah. It's an infrastructure failure we can both agree on with both how tragic it is and how difficult it seems to be to do anything about it. Guest: I wish we talked about it more in a substantive, honest, evidence-based way than we do. And I wish we took the fact that because of technology and globalization we've had a problem that's been growing for a long time, that we would actually face up to this. And it's interesting, I take a view on one piece of what you said--maybe it's a good segue to the macro--that is a little bit different from others. We had our housing bubble and collapse, and the housing bubble provided jobs, not huge numbers, but provided jobs-- Russ: Millions-- Guest: That went away. And I view that not as a business cycle but as the last hurrah of trying to do anything to employ people who otherwise weren't going to get employed, through easy credit policy. So I view the boom in the housing market basically as the Fed's fairly pathetic response to this deeper structural problem. In other words, we've had a weak labor market for quite a while. And the only way we've been able to address it is by pumping in a lot of money, into housing. And of course that leads to a bubble, and it leads to a collapse, and it's a very short-sighted policy. But the Fed, which is a very short-sighted institution, has simply looked at the labor market, said it's weak; and therefore it's our mandate to lower interest rates, put the pedal to the floor, pump up liquidity. And so we get these housing bubbles not because of mere accidents or deranged regulation, though that's part of it. We get them in part as a macro response, a policy response, to this underlying structural challenge. Which we didn't want to discuss. And so the only way we end up discussing it is through monetary policy. Russ: Let's stick with this education issue for another minute, because I think it is important. Let's have a few minutes of substance on it. I would just add that the technology revolution in education, which I hope is coming, I hope, is going to create a lot of inequality in our profession. There are going to be some very successful people who can master that technology, who can reach a much larger group of people, make a lot more money; and there are going to be a lot of academics who are going to have trouble making a living. Which probably is for the best. Those of us who can't reach large audiences will have to find something more productive to do. Guest: Well, we're going to be like the music industry. Exactly what's happened there as well. A few bands make it, and lots of others have their music heard but they don't have much of an income. Russ: Yeah. But for people who love music or are intellectually curious, it's a great time to be alive. Guest: I think that's right. And I think for education we can have a boom of access. But it is going to be pretty disruptive.
36:41Russ: Let's talk for a minute about that education issue, the world we are in now, these changes we hope are coming. The world we are stuck with at least for some time. Especially at the K-12 level. I live in a suburban Maryland town with phenomenal public schools. There's a bunch of them out here: Bethesda, Potomac. Schools are great; public schools are great here. You go into the city, they are awful. And you asked for an evidence-based discussion of this issue. It's hard to do. Because we have family issues, we have cultural issues. We have teacher-quality issues. Very hard to disentangle. And we have a system that's unbelievably inflexible, on every dimension. It's still 25 kids, 40 kids, 18 kids sitting at desks, doing stuff with a teacher in front of the room. We don't have an apprentice system. We don't have a technical training system. We have a fantasy that: Oh, if everybody could just learn science and math and engineering, technology, we could all be rich. But not everybody can do those things. How do you--my preference, of course, is to get the government out of the business of educating people and let the private sector and voluntary activity--I think we could do a better job. But I doubt you share that view. So, what would be your recommendation for how we evolve, or at least move forward, given these challenges? Guest: I think the first thing I would like us to do is to look at some of the international experience more closely. Because I think there are a lot of very interesting lessons of success stories that we could benefit from. I'll mention two. One is Germany, of course, which is now rightly famous for standing out, not quite alone but as part of a Northern European distinctiveness of low youth unemployment. They have a tradition that goes back, actually to the Guild Age, of course, of apprenticeships. But they've thought very hard about the school-to-work transition. Starting from what should schools do, what kind of skills are needed, what is a true vocational skill track for skilled craftsmen, which is a skill very much a German tradition. And then they have public subsidies to enable companies to take on very raw, early apprentices. And many of those apprentices, which are part of a formal program, then turn into long-term jobs within that company itself. And others just have given the ground-level experience to young people to understand what the labor market is. So, to my mind that kind of active labor market policy is smart. It's complicated, and it's not what we have. We have kind of an industrial machine which probably worked in the industrial age, where you churn out kids to 10th grade or 12th grade and then there was a market for them. And that's not working now. The second, I think, is very important, is Finland. A wonderful book that I recommend is called Finnish Lessons, about Finland's kind of self-realization that they were at the top of the world's charts on these Program for International Student Assessment (PISA), international standards tests. And they don't even test there. So they went into their own internal analysis: What did we do to get to the top of these standardized results when we don't even have a culture of testing? The point there, which is almost at the other end of the extreme here--and I don't want to oversimplify this but I think it is at the core--is that Finland as a homogeneous society with a tradition of social, socioeconomic, and religious homogeneity, has an incredibly strong ethic of equality. And the view--this educator, who was one of the lead education reformers in Finland, writes in this book, Finnish Lessons, is that the starting point is the idea that every kid in Finland needs a decent start and a decent education. They kind of worked backwards from that fundamental premise into the design of their schools, their school systems. They are strongly unionized, by the way; but their teachers are held in extremely high social repute. They are the esteemed members of society. But there was a real norm of equality. Now the United States has absolutely no such norm. We ran away from it, especially over the last 40 years. We have the most tracked differences, how rich families want their kids to be educated, and that's largely in private schools; and how average families in the middle have their kids educated, are just completely different things. So we see that difference, but there's a huge resource difference involved, and I think it's really looking at how do kids of the top 1%, what kind of schools do they go to, how much does it cost to educate them, and so forth. What happens for the rest of society is completely different. But then I think there are obviously these very deep social realities in our country; but they are not just fate. They are partly our public response. The African-American community has been devastated, in my view, by the way we have engaged in the so-called 'war on crime', from the late 1960s onward. We've had an epidemic of incarceration unmatched in the entire world; and now we're into the second and the third generation of kids growing up without fathers, and with 2 and a half million young people behind bars. It's mind-bogglingly wrong headed, and it's a big part of the problem that isn't discussed. It's also fueled by the worst incentives imaginable. We have privatized the prisons; and the prisons actually lobby for customers--customers that the state system gives them. And they are perfectly aware of what great business it is to lock up a kid because he's been caught with a joint and to keep him behind bars for years. That's business. And so every time we privatize something, we also create a lobby around it. That's part of the political economy. And we also ought to think about that side of it as well. Russ: We did a podcast with Becky Pettit on many of those issues. I do think it's more than that. I agree there's some bad political economy there. We have a war on drugs that has been very expensive, with very little to show for it other than putting a lot of people in jail. Guest: Yeah, nothing to show for it, I would say. Russ: And enriching police bureaucracies and some other, as you say, profiteers, people who make money off the system, that's not really accomplishing anything. But there's also family structure issues that go beyond the African-American community that are correlated, I don't know what the reason is, with low education. A lot of people growing up without two parents in the home, we have a culture that says that's no big deal. At least a public culture. Whether that's true or not I think is the great experiment we've embarked on over the last few decades, that's tangled up with a lot of things we're talking about.
45:27Russ: Let's move to the macroeconomics, because it's an area that it would be nice to agree with you on. You've been very critical lately about an area you call 'crude Keynesianism'--in particular the evaluation of stimulus spending of 2009 as well as the significance of deficits and the size of the national debt. And you've taken quite a bit of heat from some people who share your ideology overall but don't like this. So, talk about what you mean by crude Keynesianism, why you think it's wrong, and is there a Keynesianism you want to defend that's not so crude. Guest: Well, since I start from the premise that we have deep, structural, long-term issues, my view of the role of government and public investment and the budget is about providing public goods as I understand them, and the things we've been talking about, whether it's infrastructure or skills or research and development (R&D) for renewable energy to combat climate change. I want the government there to do the things that the private sector doesn't do for all sorts of reasons. And view public economics as a benchmark for that. Now of course we could have a debate about every one of those things. We've discussed some of them. And I take, generally, a fairly expansive view of what I think government can and should do to address some of these deep structural issues. Where I part company with some, say, government-friendly advocates, is that, since I take a long-term and structural view of these problems, I don't think that short term, aggregate demand management is really the point of most of what we face. And the 2008 financial crisis was for me kind of the epitome of this parting of the paths with a lot of people, because when the bubble burst, I said: Well, my view is that the housing bubble itself was a symptom, not a cause. Of course, it was a cause of the immediate cycle-- Russ: A proximate cause. Guest: It was a proximate cause, but it was not a deep cause. I view Alan Greenspan as an endogenous politician, to a deeper set of issues; and I viewed the easy money policy of the Fed as an easy, unwise political response to soft labor markets in the early 2000s. Soft for deeper reasons that we've been discussing. So, pumping up the housing market I viewed as just an endogenous policy response, not a cause in and of itself. Not a prime mover of the crisis. But when President Obama came in and Larry Summers became his top adviser, and Paul Krugman, and others were rallying, they basically took the view, in my interpretation--which they don't find very charitable--but I thought that they took the view: Let's recreate the bubble. What do we know how to do? Well, we get people employed by construction. We get people employed by putting them back to work selling consumer products and so forth. I thought it was pretty unimaginative, because it didn't ask the question: How did we get to 2008? They just said: Well, it's a business cycle, and now that unemployment is high we have an aggregate demand problem and let's stimulate the economy and put people back to work. And I was rather shocked actually, because Obama came in, of course with one of the great messes of modern times. And the budget deficit, because of the cyclical reasons, and the Troubled Asset Relief Program (TARP) was already above a trillion dollars. And if I were in that position at that point, I would say: My God, I inherited more than a trillion dollar flow deficit, we've got huge challenges ahead; we've got to take some small steps to get this deficit down. We shouldn't do large things because we do need a bit of automatic stabilizer right now, but let's head in the direction of getting this deficit under control. But they did exactly the opposite. They doubled down on the deficit. We don't know the counterfactuals, but maybe raising it from $1.2 trillion to $1.6 trillion, say, in 2009. I was shocked. Russ: And keeping it for a few years. Guest: And then every time there was an option to start moving it down, until recently--I know the White House view, because I was discussing it with them often, was: We need another year of stimulus. We need another temporary tax cut, another payroll tax cut, an extension of the Bush tax cuts, and so forth. None of which I agreed with because, you know, from my philosophy I wanted more revenues to fund public goods and at the same time to reduce the deficit because I think that this buildup of debt just builds up lots of problems in the future. Russ: Let's talk about those. Because I think--well go ahead, you can finish. Guest: And the crude Keynesian part of it, in addition to what I regard as a misinterpretation of this crisis, just calling it an aggregate demand business cycle, basically, is two other things at least. One is the feeling that macroeconomics is just turning a dial, and fiscal policy has a multiplier on the spending side of 1.5 and on the tax side of 1, or whatever it is, and that's good enough and those are reliable multipliers and we can count on them. And I just find that view wholly unpersuasive both on a theoretical and on an empirical basis. So I didn't believe that those dials were there to turn. The second aspect of the crudeness of the Keynesianism was the constant dismissal of the harms of building up public debt. And of course that continues to this day. But this is part and parcel of Keynes's famous quip, which I don't think even he believed and it was just too good to pass up, probably--the one that 'in the long run, we're all dead.' In the not so distant future we are going to have a massive amount of debt on our books that is going to have to be serviced, and that's going to create its own fiscal challenges; and since I'm so interested in public investment and public programs to solve problems, I just see that debt as crowding out things that are going to be important in the future. And for Paul Krugman to just blithely say, Don't worry about it--as the public debt goes from 37% of Gross Domestic Product (GDP) in 2007 to 75% of GDP today, and on his favorite trajectory would continue to grow into the 80-90% of GDP--I said: Come on, Paul! We've got things we need to do with government revenues other than servicing debt in the future. And that's why I view that as quite odd and quite wrong-headed. Russ: Well, I think his response would be--he'd say two things. Well, he said two things. One would be: Well, look at Japan. They are way over that and they are not dying. And number two, interest rates--I hear this all the time, and it doesn't make sense to me, but I'll let you respond to it--are so low, it's cheap, it's almost free, it's practically free; why are you worrying about it? Guest: Well, if we were financing a long term project at very low interest rates on a long term debt, I think there's probably an argument there for certain kinds of investment programs. But if we are financing our general government budget deficit, taking pains by the way through public policy of the Fed to shorten the maturity of the public debt and at the same time with every reason to believe that interest rates will rise back to normal levels in the future when the Fed's (Quantitative Easing) QE1, QE2, QE3, QEn policies finally stop, I think it's just a matter of looking ahead a few years. And the Congressional Budget Office, (CBO) does look ahead a decade in its scenario and it says interest rates are likely to rise by the end of this decade from near zero today to maybe 4 or 5 percentage points on short term debt, on average high enough to drive the debt servicing from the current level of about 1.5% of GDP up to something like 3.3%, 3.4% of GDP early in the 2020s. Now, going up to 3.3, 3.4% of national income in debt servicing is not very attractive to me. Because that would mean on the current CBO baseline that we would be spending more on simply servicing the public debt than we'd be spending on the entire sum of civilian discretionary programs for jobs, for education, for infrastructure, for environment, for climate change, for science and technology. And I don't want to do that. And since we all have Excel, we can make these calculations and say we don't have to do that. We should be more restrained on our borrowing so that we don't get into that trap ten years from now.
55:57Guest: And I think Paul Krugman has really done a bit of a disservice by saying that the only test is whether we are going to have a financial market panic in the future. Russ: Right. I think that's a bizarro standard for whether it's a good idea or not. Guest: Exactly. Because the most basic point-- Russ: It's all free. Guest: Yes. The most basic point of intertemporal public economics is that you have to service your debt in the future. You don't have a Bernie Madoff scheme at hand, you don't have a Ponzi scheme at hand. You are going to have to service this stuff. And that's going to require revenues and those revenues are going to face political resistance; they are going to crowd out other things; and they are going to be distortionary. So, just building up debt has a cost. If you are doing an optimal control to your budget, you have a shadow price to building up that debt, and if you do it in a more straightforward way, you have to pay for it. It's not free. And a good metric is that you have to pay for it in present value and that means taking on a dollar of debt you are going to have to raise a dollar of revenues or cut a dollar of spending or do some combination of the two in the future. And you better think ahead about that and not be so blithe. Now, of course, there's another voodoo side of this which is the voodoo left that in my view which is in my view no less or more meritorious than the voodoo right--which said, cut taxes; it pays for itself. Well, the voodoo left says: spend more money; it pays for itself. And to my mind these are both examples of profound wishful thinking that are naive, counter to experience, and invite abuse. And so I don't like them on either side. Russ: They are both perpetual motion machines to an extent that promise something that is so deliciously seductive but doesn't seem to materialize.
58:03Russ: One last comment on the Keynesian part and then we are going to have to close so I want to get some quick comments from you. You said that the stimulus story, the dials that you can't turn because they are not there--I'm very sympathetic to that view, being a Hayekian. But you said also that the empirical evidence isn't there. I've come to believe that it's hard to assess the merits of these claims on either side, both the skeptics of these claims, like my own view, or the people who claim that they know what the multiplier is. The CBO can't really measure what the effect of the stimulus is. They admit they can't construct the counterfactual. We certainly are in a different regime of policy and financial sector stability. What's your view on vulnerability[?]? We can understand the connections between the dials, or the non-connections, and the rest of the economy. Guest: Well, first, we're operating in a complex system so it's not hard to see why we can't understand these things with the precision that is sometimes pretended. Second, many people are confused by the frequent CBO reports that says the stimulus has created x million jobs. Russ: Those are lies. Guest: They don't understand that what that is is simply running the CBO model. It's not any outcomes at all. At all. But it gets quoted so frequently, and misunderstood. So I think it's worth bearing in mind. Third, I would turn to the theory. The theory says that temporary tax cuts and transfers shouldn't be expected to have much of an effect. And one of the things that I really disliked about the stimulus--and it's many things that I disliked about it--was that it was overwhelmingly temporary tax cuts and transfer payments. Exactly the kind that even in theory you wouldn't expect to have much of an effect. Because the theory says you should smooth that stuff. Getting a payroll tax cut for a year, it's some kind of income, a tax cut for a year or two, that's not going to do very much, and it shouldn't do very much, for your spending decisions. So I think on a theoretical basis I was very skeptical. I thought the content of the stimulus was what you would expect to come out of a back room of a Congressional Committee, basically the Democratic side of a Congressional Committee, in six weeks. Which is nothing very sensible for the long term. So that was a third point of my skepticism. Fourth point was of course the forecast didn't work. And as a Bayesian I take that as a sign that something is probably wrong in some of the linkages of this standard view. And what didn't work was the idea that we would be back to low unemployment, small budget deficits, and rapid growth already by 2011, 2012. And so whatever the others say, their forecasts didn't work. And they of course respond: Well, many other things intervened and if we hadn't done this, of course the stimulus didn't work exactly as we said it would but other things happened and that's why we didn't get the full effect. But I think that's not a very persuasive argument, actually. Russ: It's what Nassim Taleb calls the 'narrative fallacy.' He's right. I just want to apologize--I said that the CBO estimates about the job creations were 'lies.' That's not quite true. They are very honest about the fact that they just took their model and ran it again with the actual numbers of the stimulus amounts. They just took their forecast and re-ran it with the actual numbers and called that their estimate. Guest: What's [?] though is how no news outlet--I shouldn't say. The mainstream news just reported that straightforwardly. Russ: That's the lie part. Guest: The stimulus created so many jobs. That's shocking misunderstanding. Russ: That's what I meant. When I said lies, it's the pundits and news reports that took those as if they were something vaguely scientific.
1:02:34Russ: To close, how has this very dramatic economic set of events we are talking about, which have probably grown, and your appreciation and understanding of it has probably changed over time and gotten richer. But for many of us, myself particularly and I'd like to know if it's true for you, this set of events forced us to think very differently about the way we think about economics. Has this changed for you? Are there lessons you've learned from the Crisis that you think are central, and do you think the profession has yet to learn? Guest: I don't think the profession is in very good shape. And I think of course our profession is hard. In some ways, actually, although people will object to this, it's harder than math and the natural sciences. Because we're trying to take aim to understand not only a complex system, but a complex system that is changing over time. Whereas at least a cell biologist is basically looking at the same phenomenon year in, year out, decade in, decade out. And that cell, while it evolves very slowly, it doesn't evolve at the same rate that the complex global economy does. So, my feeling is we've got a very hard job to do and we don't do it well. And I think that this recent few years has exposed the shortcomings more and more. It's led me to the view which I think I had, but I feel more strongly--that we really need to focus a lot more of our time and understanding on change: understanding long term, structural change. This is what makes our field hard, actually. If we were really in a stationary economy, meaning that the probability distributions were relatively unchanging over time, we'd figure this out. My view is that what makes this hard is not only the complexity, which makes statistical identification hard, counterfactuals hard; but what makes this especially hard is that the underpinning, the substrate of the economy is changing over time. So that our equations are never right. Because structure is the deepest part of our change over a period of ten or twenty years. And if we don't understand that in a more substantive way, the idea that business cycles are just simply overlaid on this and we have a kind of stationary theory of business cycles is also wrong. At least since my interpretation is that we're living in a mix of these two different temporal experiences--the longer term and the short term overlaid and interacting with each other. I love the field, this is my 41st year in economics, so that's a lot, and I've not regretted one day of choosing this as my life's work. But I wouldn't say that we're at a healthy moment as a profession right now, and we should take some lessons from this and figure out how to take a strong, theoretical set of ideas which are very, very good but don't define the world because they define too many worlds, too many possibilities, and link them more adequately to evidence, and a richer set of evidence and a better way to do the empirical work. And I think that this latest episode in broad public view has really exposed a lot of the weaknesses of the profession as it is right now.