back to indexPaul Krugman: Economics of Innovation, Automation, Safety Nets & UBI | Lex Fridman Podcast #67
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The following is a conversation with Paul Krugman, Nobel Prize winner in economics,
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professor at CUNY, and columnist at the New York Times. His academic work centers around
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international economics, economic geography, liquidity traps, and currency crises. But he
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also is an outspoken writer and commentator on the intersection of modern day politics
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and economics, which places him in the middle of the tense, divisive, modern day political discourse.
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If you have clicked dislike on this video and started writing a comment of derision before
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listening to the conversation, I humbly ask that you please unsubscribe from this channel
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and from this podcast. Not because you're conservative, a libertarian, a liberal,
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a socialist, an anarchist, but because you're not open to new ideas, at least in this case,
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especially at its most difficult, from people with whom you largely disagree.
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I do my best to stay away from politics of the day because political discourse is filled
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with a degree of emotion and self assured certainty that to me is not conducive to exploring
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questions that nobody knows the definitive right answer to. The role of government,
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the impact of automation, the regulation of tech, the medical system, guns, war, trade,
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foreign policy, are not easy topics and have no clear answers, despite the certainty of the so
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called experts, the pundits, the trolls, the media personalities, and the conspiracy theorists.
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Please listen, empathize, and allow yourself to explore ideas with curiosity and without judgment
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and without derision. I will speak with many more economists and political thinkers, trying to stay
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away from the political battles of the day and instead look at the long arc of history
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and the lessons it reveals. In this, I appreciate your patience and support.
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This show is presented by Cash App, the number one finance app in the App Store.
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tech teams solve complicated problems to provide, in the end, a simple, effortless interface that
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abstracts away all the details of the underlying algorithm. And now, here's my conversation with
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Paul Krugman. What does a perfect world, a utopia, from an economics perspective look like?
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Wow, I don't really, I don't believe in perfection. I mean, somebody once once said
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that his ideal was slightly imaginary Sweden. I mean, I like an economy that has a really high
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safety net for people, good environmental regulation, and something that's kind of like
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some of the better run countries in the world, but with fixing all of the smaller things that
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are wrong with them. What about wealth distribution? Well, obviously, you know, total equality is
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neither possible nor, I think, especially desirable, but I think you want one where,
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basically one where nobody is hurting and where everybody lives in the same material universe.
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Everybody is basically living in the same society, so I think it's a bad thing to have
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people who are so wealthy that they're really not in the same world as the rest of us.
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What about competition? Do you see the value of competition? What may be its limits?
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Oh, competition is great when it can work. I mean, I remember, I'm old enough to remember
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when there was only one phone company and there was really limited choice, and I think the
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arrival of multiple phone carriers and all that has actually, you know, it's been a really good
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thing, and that's true across many areas, but not every industry is, not every activity is suitable
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for competition. So, there are some things like healthcare where competition actually
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doesn't work, and so it's not one size fits all.
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That's interesting. Why does competition not work in healthcare?
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Oh, there's a long list. I mean, there's a famous paper by Kenneth Arrow from 1963,
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which still holds up very well, where he kind of runs down the list of things you need for
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competition to work well. Basically, both sides to every transaction being well informed,
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having the ability to make intelligent decisions, understanding what's going on,
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and healthcare fails on every dimension.
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Healthcare, so not health insurance, healthcare.
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Well, both healthcare and health insurance, health insurance being part of it, but no,
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health insurance is really the idea that there's effective competition between health insurers is
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wrong, and healthcare, I mean, the idea that you can comparison shop for major surgery is just,
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you know, when people say things like that, you wonder, are you living in the same world I'm
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You know, that piece of well informed, that was always an interesting piece for me,
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just observing as an outsider, because so much beautiful, such a beautiful world is
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possible when everybody's well informed. My question for you is, how hard is it to be
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well informed about anything, whether it's healthcare, or any kind of purchasing decisions,
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or just life in general in this world?
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Oh, information, you know, it varies hugely. I mean, there's more information at your
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fingertips than ever before in history. The trouble is, first of all, that some of that
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information isn't true. So it's really hard. And then some of it is just too hard to understand.
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So if I'm buying a car, I can actually probably do a pretty good job of looking up, you know,
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going to consumer reports, reviews, you can get a pretty good idea of what you're getting
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when you get a car. If I'm going in for surgery, first of all, you know, fairly often it happens
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without your being able to plan it. But also, there's a, you know, medical school takes
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many, many years, and going on the internet for some advice is not usually a very good
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So speaking about news and not being able to trust certain sources of information,
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how much disagreement is there about, I mentioned utopia, perfection in the beginning, but how much
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disagreement is there about what utopia looks like? Or is most of the disagreement simply about the
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path to get there?
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Oh, I think there's two levels of disagreement. One, maybe not utopia, but justice. You know,
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what is a just society? And that's, there are different views. I mean, I teach my students
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that there are, you know, broadly speaking, two views of justice. One focuses on outcomes.
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You ask yourself, a just society is the one you would choose if you were trying to,
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the one that you would choose to live in if you didn't know who you were going to be,
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that's kind of John Rawls. And the other focuses on process, that a just society is one in which
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there is no coercion except where absolutely necessary. And there's no objective way to choose
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between those. I'm pretty much a Rawlsian, and I think many people are. But anyway, so there's a
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legitimate dispute about what we mean by a just society anyway. But then there's also a lot of
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a lot of dispute about what actually works. There's a range of legitimate dispute. I mean, any
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card carrying economist will say that incentives matter, but how much do they matter? How much does
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a higher tax rate actually deter people from working? How much does a stronger safety net
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actually lead people to get lazy? I have a pretty strong view that the evidence points to conclusions
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that are considerably to the left of where most of our politicians are. But there is legitimate
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room for disagreement on those things. So you've mentioned outcomes. What are some metrics you
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think about that you keep in mind, like the Gini coefficient, but really anything that measures
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how good we're doing, whatever we're trying to do? What are the metrics you keep an eye on?
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Well, I'm actually I'm not a fan of the Gini coefficient, not because what is the Gini
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coefficient? Yeah, the Gini coefficient is a measure of inequality, and it is commonly used
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because it's a single number. It usually tracks with other measures, but the trouble is there's
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no sort of natural interpretation of it. If you ask me what does a society with a Gini of 0.45
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look like as opposed to a society with a Gini of 0.25? And I can kind of tell you, you know,
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when 0.25 is Denmark and 0.45 is Brazil, but there's no sort of easy way to do that mapping.
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I mean, I look at things like what is, first of all, things like what is the income of the
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median family? What is the income of the top 1%? How many people are in poverty by
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various measures of poverty? And then I think you want to look at questions like
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how healthy are people? How is life expectancy doing? And how satisfied are people with their
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lives? Because there is that sounds like a squishy number, not so much happiness. It
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turns out that life satisfaction is a better measure than happiness. But life satisfaction,
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that varies quite a lot. And I think it's meaningful, if not too rigorous to say, look,
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according to polling, people in Denmark are pretty satisfied with their lives and
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people in the United States, not so much so. And of course, Sweden wins every time.
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No, actually Denmark wins these days. Denmark and Norway tend to win these days. Sweden doesn't do
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badly. None of these are perfect. But look, I think by and large, there's a bit of a
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pornography test. How do you know a decent society? Well, you kind of know it when you see it.
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Right. Where does America stand on that?
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We have a remarkable... There are a lot of virtues to America, but there's a level of harshness,
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brutality, an ability for somebody who just has bad luck to fall off the edge, that is really,
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shouldn't be happening in a country as rich as ours. So we have somehow managed to produce a
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a crueller society than almost any other wealthy country for no good reason.
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What do you think is lacking in the safety net that the United States provides? You said
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there's a harshness to it. And what are the benefits and maybe limits of a safety net
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in a country like ours? Well, every other advanced country has some
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universal guarantee of adequate healthcare. The United States is the only place where
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citizens can actually fail to get basic healthcare because they can't afford it.
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It's not hard to do. Everybody else does it, but we don't. We've gotten a little bit better at it
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than we were, but still, that's a big deal. We have remarkably weak support for children.
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Most countries have substantial safety... Parents of young children get much more support elsewhere.
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They get often nothing in the US. We have limited care for people. Long term care for the elderly
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is a very hit and miss thing. But I think that the really big issues are that we don't take care of
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children who make the mistake of having the wrong parents, and we don't take care of people who make
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the mistake of getting sick. And those are things that a rich country should be doing.
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Sorry for sort of a difficult question, but what you just said kind of feels like the right thing
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to do in terms of a just society. But is it also good for the economic health of society to take
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care of the people who are the unfortunate members of society?
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By and large, it looks like doing the right thing in terms of justice is also the right thing in
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terms of economics. If we're talking about a society that has extremely high tax rates that
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deter, remove all incentives to provide a safety net that is so generous that why bother working
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or striving, that could be a problem. But I don't actually know any society that looks like that.
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Even in European countries with very generous safety nets, people work and innovate and do all
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of these things. And there's a lot of evidence now that lacking those basics is actually destructive,
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that children who grow up without adequate health care, without adequate nutrition,
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are developmentally challenged. They don't live up to their potential as adults. So the United
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States actually probably pays a price. We're harsh, we're cruel, and we actually make ourselves poorer
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as a society, not just the individuals, by being so harsh and cruel.
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Okay, so Invisible Hand, Smith, where does that fit in? The power of just people acting selfishly
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and somehow everything taking care of itself to where the economy grows,
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nobody, there's no cruelty, no injustice, that the markets regulate themselves. Is there power
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to that idea and what are its limits? There's a lot of power to that. I mean, there's a reason why
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I don't think sensible people want the government running steel mills or they want the government
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to own the farms, right? The markets are a pretty effective way of getting incentives aligned,
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of inducing people to do stuff that works. And the Invisible Hand is saying that farmers aren't
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growing crops because they want to feed people, they're growing crops because they can make money
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by it, but it actually turns out to be a pretty good way of getting an agrarian
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of getting agricultural products grown. So the Invisible Hand is an important part,
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but there's nothing mystical about it. It's a mechanism, it's a way to organize economic
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activity, which works well given a bunch of preconditions, which means that it actually
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works well for agriculture, it works well for manufacturing, it works well for many services,
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it doesn't work well for healthcare, it doesn't work well for education. So having a society
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which is kind of three quarters Invisible Hand and one quarter Visible Hand, something on that
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order seems to be the balance that works best. You don't want to romanticize or make something
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mystical out of it. This is one way to organize stuff that happens to have broad but not universal
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application. So then forgive me for romanticizing it, but it does seem pretty magical. I kind of
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have an intuitive understanding of what happens when you have like five, ten, maybe even a hundred
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people together, the dynamics of that. But the fact that these large society of people for the
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most part acting in a self interested way and maybe electing representatives for themselves,
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that it all kind of seems to work, it's pretty magical. The fact that right now there's a wide
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assortment of fresh fruit and vegetables in the local markets up and down the street, who's
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planning that? And the answer is nobody. That's the Invisible Hand at work and that's great.
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And that's a lesson that Adam Smith figured out more than 200 years ago and it continues to apply.
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But even Adam Smith has a section in his book about why it's important to regulate banks.
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So the Invisible Hand has its limits. And that example is actually a powerful one in terms of
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the supermarket and fruit. That was my experience coming from Russia from the Soviet Union is when
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I first entered a supermarket and just seeing the assortment of fruit, bananas. I don't think I've
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seen bananas before, first of all, but just the selection of fresh fruit was just mind blowing.
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Beyond words and the fact that, like you said, I don't know what made that happen.
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Well, there is some magic to the market. As showing my age, but the old movie quote,
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sometimes the magic works and sometimes it doesn't. And you have to have some idea of when
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it doesn't. So how do you get regulation? What can government at its best do? Government,
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strangely enough in this country today, seems to get a bad rap. Everybody's against the government.
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Yeah. Well, a lot of money has been spent on making people hate the government.
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But the reality is government does some things pretty well. I mean, government does health
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insurance pretty well. So much so, I mean, given our anti government bias, it really is true that
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there are people out there saying, don't let the government get its hands on Medicare. So
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people actually love the government health insurance program far more than they love
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private health insurance. Basic education. It turns out that your local public high school
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is the right place to have students trained and private for, certainly for profit education is
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by and large a nightmare of rip offs and grift and people not getting what they thought they
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were paying for. It's a judgment case. And it's funny, there are things, I mean, everybody talks
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about the DMV as being, do you want the economy? Actually, my experience is that the DMV have
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always been positive. Maybe I'm just going to the right DMVs, but in fact, a lot of government works
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pretty well. So to some extent, you can do these things on a priori grounds. You can talk about the
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logic of why healthcare is not going to be handled well by the market, but partly it's just experience.
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We tried, or at least some countries have tried nationalizing their steel industries,
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that didn't go well. But we've tried privatizing education and that didn't go well. So you find
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out what works. What about this new world of tech? How do you see, what do you think works for tech?
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Is it more regulation or less regulation? There are some things that need more regulation. I mean,
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we're finding out that the world of social media is one in which competitive forces aren't working
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very well and trusting the companies to regulate themselves isn't working very well. But I'm on the
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whole a tech skeptic, not in the sense that I think the tech doesn't work and it doesn't do stuff,
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but the idea that we're living through greater technological change than ever before
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is really an illusion. Ever since the beginning of the industrial revolution,
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we've had a series of epical shifts in the nature of work and in the kinds of jobs that are available.
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And it's not at all clear that what's happening now is any bigger or faster or harder to cope
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with than past shocks. It is a popular notion in today's sort of public discourse that automation
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is going to have a huge impact on the job market now. There is something transformational happening
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now. Can you talk about that, maybe elaborate a little bit more? Do you not see the software
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revolutions happening now with machine learning, availability of data, that kind of automation,
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being able to sort of process, clean, find patterns in data, and you don't see that
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disrupting any one sector to a point where there's a huge loss of jobs? There may be some things. I
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mean, actually, you know, translators, there's really reduced demand for translators because
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machine translation ain't perfect, but it ain't bad. There are some kinds of things that are
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changed, but overall productivity growth has actually been slow in recent years. It's been much
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slower than in some past periods. So the idea that automation is taking away all the jobs,
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the counterpart would be that we would be able to produce stuff with many fewer workers than before,
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and that's not happening. There are a few isolated sectors. There are some kinds of jobs that are
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going away, but that keeps on happening. I mean, New York City used to have thousands and thousands
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of longshoremen taking stuff off ships and putting them on ships. They're almost all gone now. Now
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you have the giant cranes taking containers on and off ships in Elizabeth, New Jersey.
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That's not robots. It doesn't sound high tech, but it actually pretty much destroyed an
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occupation. Well, you know, it wasn't fun for the longshoremen, to say the least. But it's not,
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we coped, we moved on, and that sort of thing happens all the time. You mean farmers.
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We used to be a nation which was mostly farmers. There are now very few farmers left. And the
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reason is not that we've stopped eating, it's that farming has become so efficient that we don't need
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a lot of farmers, and we coped with that too. So the idea that there's something qualitatively
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different about what's happening now so far isn't true. So your intuition is there is going to be
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lots of jobs, but it's just the thing that just continues. There's nothing qualitatively different
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about this moment. Some jobs will be lost, others will be created, as has always been the case so
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far. I mean, maybe there's a singularity. Maybe there's a moment when the machines get smarter
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than we are, and sky tech kills us all or something, right? But that's not visible in
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anything we're seeing now. You mentioned the metric of productivity. Could you explain that
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a little bit? Because it's a really interesting one. I've heard you mention that before in
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connection with automation. So what is that metric? And if there is something qualitatively
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different, what should we see in that metric? Well, okay, productivity. First of all, production.
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We do have a measure of the economy's total production, you know, real GDP, which is
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itself, it's a little bit of a construct because it's quite literally, it's adding apples and
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oranges. So we have to add together various things, which we basically do by using market prices,
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but we try to adjust for inflation. But it's kind of, it's a reasonable measure of how much
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the economy is producing. Sorry to interrupt. Is it goods and services? It's goods and services.
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It's everything. Okay. Productivity is, you divide that total output by the number of hours worked.
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So we're basically asking how much stuff does the average worker produce in an hour of work.
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And if you're seeing really rapid technological progress, then you'd expect to see productivity
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rising at a rapid clip, which we did, you know, for the generation after World War II, productivity
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rose, you know, 2% a year on a sustained basis. Then it dropped down for a while. Then there was
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a kind of a decade of fairly rapid growth from the mid nineties to the mid two thousands.
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And then it's, it dropped off again and it's not, it's not impressive right now. So
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you're just not seeing an epical shift in, in, in the economy. So let me then ask you about
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the psychology of blaming automation. A few months ago, you wrote in the New York Times,
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quote, the other day I found myself, as I often do at a conference, discussing lagging wages and
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soaring inequality. There was a lot of interesting discussion, but one thing that struck me was how
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many of the participants just assumed that robots are a big part of the problem, that machines are
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taking away the good jobs or even jobs in general. For the most part, this wasn't even presented as
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a hypothesis, just as part of what everyone knows. So why is, maybe can you psychoanalyze our,
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the public intellectuals or economists or us actually in the general public, why this is
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happening? Why this assumption has just infiltrated public discourse? There's a couple of things.
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One is that the particular technologies that are advancing now are ones that are a lot more visible
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to the chattering class. When containerization did away with the jobs of longshoremen, well,
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not a whole lot of college professors are close friends with longshoremen. And so we see this one.
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Then there's a second thing, which is, we just went through a severe financial crisis
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and a period of very high unemployment. It's finally come down. There's really no question
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that that high unemployment was about macroeconomics. It was about a failure of demand.
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But macroeconomics is really not intuitive. I mean, people just have a hard time wrapping
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their minds around it. And among other things, people have a hard time believing that something
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as trivial as, well, people who just aren't spending enough can lead to the kind of mass
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misery that we saw in the 1930s or the not quite so severe, but still serious misery that we saw
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after 2008. And there's always a tendency to say it must be something big. It must be technological
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change. That means we don't need workers anymore. There was a lot of that in the 30s. And that same
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thing happened after 2008, the assumption that it has to be some deep cause, not something as trivial
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as a failure of investor confidence and inadequate monetary and fiscal response.
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And the last thing on wages. A lot of what's happened on wages is at some level political.
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It's the collapse of the union movement. It's policies that have squeezed workers bargaining
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power. And for kind of obvious reasons, there are a lot of influential people who don't want to hear
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that story. They want it to be an inevitable force of nature. Technology has made it impossible to
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have people earn middle class wages. And so they don't like the story that says,
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actually, no, it's kind of the political decisions that we made that have caused this income
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stagnation. And so they're a receptive audience for technological determinism.
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LW. So what comes first in your view, the economy or politics in terms of what has impact on the
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RL. Oh, look, everything interacts. That's one of the rules that I was taught in economics.
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Everything affects everything else in at least two ways. I mean, clearly the economy drives a
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lot of political stuff. But also clearly politics has a huge impact on the economy. We look at the
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decline of unions in America and say, well, the world has changed and unions don't have a role.
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But two thirds of workers in Denmark are unionized. And Denmark has the same technology
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and faces the same global economy that we do. It's just a difference in political choices that leads
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to that difference. So I actually teach a course here at CUNY called Economics of the Welfare
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State, which is about things like healthcare and retirement and to some extent wage policy and so
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on. And the message I keep on trying to drive home is that, look, all advanced countries have
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got roughly equal competence. We all have the same technology, but we make very different choices.
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Not that America always makes the wrong choices. We do some things pretty well. Our retirement
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system is one of the better ones. But the point is that there's a huge amount of political choice
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involved in the shape of the economy. What is a welfare state? Well, welfare state is the old
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term, but it basically refers to all the programs that are there to mitigate, if you like, the
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risks and injustices of the market economy. So in the US, the welfare state is Social Security,
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Medicare, Medicaid, minimum wages, food stamps. When you say welfare state, my first sort of
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feeling is a negative one. Even though I like all, I probably generally, at least theoretically,
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like all the welfare programs. Well, it's been demonized. And to some extent, I'm doing a little
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bit of thumbing my nose at all of that by just using the term welfare state. Although it's not.
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I see. Yeah, I got you. But everybody, every advanced country actually has a lot of welfare
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state, even the US. I mean, that's a fundamental part of the fabric of our society. Social Security,
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Medicare, Medicaid are just things we take for granted as part of the scene. There's a lot of
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there's people on the right wing who are saying, oh, it's all socialism. And well,
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words, I guess, mean what you want them to mean. And just today, I told my class about the
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record that Ronald Reagan made in 1961, warning that Medicare would destroy American freedom.
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And but that sort of didn't happen on the topic of welfare state. What are your thoughts on
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universal basic income? And that's sort of a not a generic, but a universal safety net of this kind?
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There's always a trade off when we talk about social safety net programs. There's always a
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trade off between universality, which is clean, but means that you're giving a lot of money to
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people who don't necessarily need it and some kind of targeting, which makes it easier to
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get to deal with the crucial problems with limited resources. But both has incentive
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problems and kind of political and I would say even psychological issues. So the great thing
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about Social Security and Medicare is no questions asked. You don't have to prove that you need them.
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It just comes. I'm on Medicare, allegedly. I mean, it's run through my New York Times health
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insurance, but I didn't have to file an application with the Medicare office to prove that I needed it.
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It just happened when I turned 65. That's good for dignity and it's also good for
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the political support because everybody gets Medicare. On the other hand, if you
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and we can do that with health care to give everybody a guarantee of an income that's
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enough to live on comfortably. That's a lot of money. What about enough income to carry you over
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through difficult periods, like if you lose a job or that kind of? Well, we have unemployment
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insurance and I think our unemployment insurance is too short lived and too stingy. It would be
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better to have a more comprehensive unemployment insurance benefit. But the trouble with something
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like universal basic income is that either the bar is too low, so it's really not something you
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can live on, or it's an enormously expensive program. And so at this point, I think that
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we can do far better by building on the kinds of safety net programs we have. I mean, food stamps,
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earned income tax credit. We should have a lot more family support policies.
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Those things can do a lot more to really diminish the amount of misery in this country.
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UBI is something that is being... I mean, it goes kind of hand in hand with this belief that
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the robots are going to take all of our jobs. And if that was really happening, then I might
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reconsider my views on UPI, but I don't see that happening. So are you happy with discourse that's
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going on now in terms of politics? So you mentioned a few political candidates. Is the kind of thing
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going on both on Twitter and debates and the media through the written word, through the spoken word,
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how do you assess the public discourse now in terms of politics? We're in a fragmented world.
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More so than before.
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More so than ever before. So at this point, the public discourse that you see if Fox News is your
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principal news source is very different from the one you get if you read the New York Times.
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On the whole, my sense is that mainstream political reporting, policy reporting is a,
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not too great, but b, better than it's ever been. Because when I first got into the pundit business,
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it was just awful. Lots of things just never got covered. And if things did get covered,
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it was always both sides. It's the line that comes back from me writing during the 2000
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campaign was that if one of the candidates said that the earth was flat, the headline would
link |
be views differ on shape of planet. I mean, that's less true. There's still a fair bit of
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that out there, but it's less true than there used to be. And there are more people reporting,
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writing on policy issues who actually understand them than ever before. So though that's good.
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But still, how much the typical voter is actually informed is unclear. I mean, the Democratic
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debates, I'm hoping that we finally get down to not having 27 people on the stage or whatever it
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is they have, but they're reasonably substantive, certainly better than before. And while there's
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a lot of still theater criticism instead of actual analysis and the reporting, it's not as totally
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dominant as in the past. Can I ask maybe a dumb question, but from an open minded perspective,
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when people on the left and people on the right, I think view the others as sometimes complete
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idiots. What do we do with that? Is it possible that the people on the right are correct about
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their what they currently believe? Is that kind of open mindedness helpful or is this division
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long term productive for us to sort of have this food fight?
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Well, the trouble you have to confront is that there's a lot of stuff that just is false out
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there but commands extensive political allegiance. So the idea, well, both sides need to listen to
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each other respectfully. I'm happy to do that when there's a view that is worthy of respect,
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but a lot of stuff is not. And so take economics is something where I think I know something,
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and I'm not sure that I'm always right. In fact, I know I've been wrong plenty of times. But I
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think that there is a difference between economic views that are within the realm of we can actually
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have an interesting discussion and those that are just crank doctrines or things that are purely
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being disseminated because people are being paid to disseminate them. So there are plenty of good,
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serious center right economists that I'm happy to talk to. None of those center right economists
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has any role in the Trump administration. The Trump administration and by and large Republicans
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in Congress only want to listen to people who are cranks. And so I think it's being dishonest with
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my readers to pretend otherwise. There's no way I can reach out to people who think that
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reading Ayn Rand novels is how you learn about monetary economics.
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Let me linger on that point. So if you look at Ayn Rand, okay, so you said center right. What
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about extreme? People who have like radical views, you think they're not grounded in any kind of data,
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in any kind of reality. I'm just sort of curious about how open we should be
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to ideas that seem radical. Oh, radical ideas is fine, but then you have to ask, is there some
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basis for the radicalism? And if it's something that is not grounded in anything,
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then, and particularly, by the way, if it's something that's been refuted by evidence again
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and again, and the people just keep saying it, if it's a zombie, if it's a
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zombie idea, and there's a lot of those out there, then there comes a point when it's not worth
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trying to fake respect for it. I see. So there's a, through the scientific process,
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you've shown that this idea does not hold water, but I like the idea of zombie ideas,
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but they live on through, it's like the idea that the earth is flat, for example,
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has been for the most part, disproven. Yeah.
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But it lives on, actually, and growing in popularity currently. Yeah. And there's a lot
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of that out there, and you can't wish it away, and you're not being fair to either yourself,
link |
or if you're somebody who writes for the public, you're not being fair to your readers to pretend
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otherwise. So quantum mechanics is a strange theory, but it's testable, and so while being
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strange, it's widely accepted amongst physicists. How robust and testable are economics theories
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if we compare them to quantum mechanics and physics and so on? Okay, economics, look, it's a
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complex system, and it's also one in which, by and large, you don't get to do experiments,
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and so economics is never going to be like quantum mechanics.
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That said, you get natural experiments, you get tests of rival doctrines. In the immediate
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aftermath of the financial crisis, there was one style, one basic theory of macroeconomics, which
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ultimately goes back to John Maynard Keynes that made a few predictions. It said, under these
link |
circumstances, the economy is going to collapse. It's going to collapse. It's going to collapse.
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Printing money will not be inflationary. Running big budget deficits will not cause a rise in
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interest rates. Slashing government spending austerity policies will lead to depressions if
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tried. Other people had exactly the opposite predictions, and we got a fairly robust test,
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and one theory won. Interest rates stayed low. Inflation stayed low. Austerity, countries that
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implemented harsh austerity policies suffered severe economic downturns. You don't get much,
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you know, that's pretty clear, and that's not going to be true on everything,
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but there's a lot of empirical. I mean, the younger economists these days are very heavily
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data based, and that's great, and I think that's the way to go.
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Trey Lockerbie What theories of economics are there? Is there currently a lot of disagreement about, would you say?
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John Ligato Oh, first of all, there's just a lot less disagreement, really, among serious
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researchers in economics than people imagine. We actually, we can track that. The Chicago Booth
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School has a panel, an ideologically diverse panel, and they pose regularly posed questions,
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and on most things, there's a huge, there's remarkable consensus. There's a lot of things
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where people imagine that there's dispute, but the illusion of dispute is something that's
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basically being fed by political forces, and there isn't really. I mean, there are, I think,
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questions about what are effective ways to regulate technology industries. We really don't know
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the answers there. There's a, or, look, I don't follow every part. Minimum wages. I think there's
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pretty overwhelming evidence that a modest increase in the minimum wage from current levels
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would be, would not have any noticeable adverse effect on jobs. But if you ask, how high could it
link |
go? $12 seems pretty safe, given what we know. Is $15 okay? There's some legitimate disagreement
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there, I think probably, but people have a point. $20, where is the line at which it starts to
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become a problem, and the answer is, truly, we don't know. It's fascinating to try to,
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such a cool, economics is cool in that sense, because you're trying to predict something that
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hasn't been done before, the impact, the effects of something that hasn't been done before.
link |
Yeah, you're trying, you're going out of sample, and we have good reason to believe that there are,
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you know, that it's nonlinear, that there comes a point at which it doesn't work the way it has
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in the past. So, as an economist, how do you see science and technological innovation? When I
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took various economics courses in college, technological innovation seemed like a
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no brainer way of growing an economy, and we should invest in it aggressively. I may be biased,
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but it seemed like the various ways to grow an economy, it seems like the easiest way,
link |
especially long term. Is that correct? And if so, why aren't we doing it more?
link |
Well, that's, okay, the first question is, yeah, I mean, all, it's pretty much overwhelming.
link |
We think we can more or less measure this, although there are some assumptions involved,
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but it's something like 70 to 80% of the growth in per capita income is basically the advance
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of knowledge. It's not just, it's not just the crude accumulation of capital. It is the fact
link |
that we get smarter. A lot of that, by the way, is more prosaic kinds of technology. So, you know,
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I like to talk about things like containerization, or, you know, in an earlier period,
link |
the invention of the flat pack cardboard box. That had to be invented, and now all of your
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deliveries from Amazon are made possible by the existence of that technology. The web stuff is
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important too, but what would we do without cardboard boxes?
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But all of that stuff is really important in driving economic progress. Well, why don't we
link |
invest more? Why don't we invest more in, again, more prosaic stuff? Why haven't we built another
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goddamn rail tunnel under the Hudson River, for which the need is so totally overwhelmingly
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obvious? How do you think about, first of all, I don't even know what the word prosaic means,
link |
but I inferred it, but how do you think about prosaic? Is it the really most basic, dumb
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technology innovation, or is it just like the lowest hanging fruit of where benefit can be
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gained? When I say prosaic, I mean stuff that is not sexy and fancy and high tech. It's building
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bridges and tunnels, inventing the cardboard box, or the, I don't know, where do we put
link |
EasyPass in there? It is actually using some modern technology and all that, but it's not
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going to have, I don't think we're going to make a movie about the guy, whoever it was that invented
link |
EasyPass, but it's actually a pretty significant productivity booster. To me, it always seemed like
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it's something that everybody should be able to agree on and just invest. So in the same way,
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the investment in the military and the DOD is huge. So everyone kind of, not everyone, but
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there's an agreement amongst people that somehow that a large defense is important. It always
link |
seemed to me like that should be shifted towards, if you want to grow prosperity of the nation,
link |
you should be investing in knowledge. Yes, prosaic stuff, investing in infrastructure and so on.
link |
I mean, sorry to linger on it, but do you have any intuition? Do you have a hope that that changes?
link |
Do you have intuition why it's not changing? It's unclear.
link |
More than intuition, I have a theory. I'm reasonably certain that I understand why
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we don't do it. And it's because we have a real values dispute about the welfare state,
link |
about how much the government should do to help the unfortunate. And politicians believe,
link |
probably rightly, that there's a kind of halo effect that surrounds any kind of government
link |
intervention. That even though providing people with enhanced social security benefits is really
link |
very different from building a tunnel under the Hudson River, politicians of both parties seem
link |
to believe that if the government is seen to be successful at doing one kind of thing,
link |
it will make people think more favorably on doing other kinds of things. And so we have
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conservatives tend to be opposed to any kind of increase in government spending, except military,
link |
no matter how obviously a good idea it is, because they fear that it's the thin end of
link |
the wedge for bigger government in general. And to some extent, liberals tend to favor
link |
spending on these things, partly because they see it as a way of proving that government can
link |
do things well, and therefore it can turn to broader social goals. What you might have thought
link |
would be a technocratic discussion about government investment, both in research and
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in infrastructure, is contaminated by the fact that government is government and people link it
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to other government actions. Perhaps a silly question, but as a species, we're currently
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working on venturing out into space, one day colonizing Mars. So when we start a society
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on Mars from scratch, what political and economic system should it operate under?
link |
Oh, I'm a big believer in... First of all, I don't think we're actually going to do that,
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but let's hypothesize that we colonize Mars or something. Look, representative democracy
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versus pure democracy. Well, yeah, pure democracy where people vote directly on everything is really
link |
problematic, because people don't have time to try and master every issue. I mean, we can see
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what government by referendum looks like. There's a lot of that in California, and it doesn't work
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so good because it's hard to explain to people that the various things they vote for may conflict.
link |
So representative democracy, it's got lots of problems. And kind of the Winston Churchill thing,
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right? It's the worst system we know, except for all the others. So yeah, sticking with the
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representative and basically the American system of regulation and markets and the economy we have
link |
going on is a pretty good one for Mars. If you start from scratch. If you're gonna start from
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scratch, you wouldn't want a Senate where 16% of the population has half the seats.
link |
You probably would want one which is actually more representative than what we have.
link |
And the details, it's unclear. When times are good, all of the various representative
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democracy systems, whether it's parliamentary democracies or a US style system, whether you
link |
have a prime minister or the head of state as an elected president, they all kind of work well,
link |
when times are good, and they all have different modes of breakdown. So I'm not sure I know what
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the answer is. But something like that is given what we've seen through history, it's the least
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bad system out there. I'm a big fan of the TV series The Expanse, and it's kind of gratifying
link |
that out there, it's the Martian Congressional Republic. In a brief sense, so amongst many things,
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you're also an expert at international trade. What do you make of the complexity? So I can
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understand trade between two people, say two neighboring farmers. It seems pretty straightforward
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to me. But internationally, we need to start talking about nations and nations trading seems
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to be very complicated. So from a high level, why is it so complicated? What are all the different
link |
factors that weigh the objectives that need to be considered in international trade? And maybe
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feeding that into a question of, do you have concerns about the two giants right now of the
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U.S. and China, and the tension that's going on with the international trade there with the trade
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war? Well, first of all, international trade is not really that different from trade among
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individuals. It's vastly more complex, and there are many more players. But in the end, the reasons
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why countries trade are pretty much the same as the reasons why individuals trade. Countries trade
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because they're different, and they can derive mutual advantage from concentrating on the things
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they do relatively well. And also, there are economies of scale. Individuals have to decide
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whether to be a surgeon or an accountant. It's probably not a good idea to try and be both,
link |
and countries benefit from specializing just because of the inherent advantages of specialization.
link |
Now, the fact that it's a big world, and we're talking about millions of products being traded,
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and in today's world, often trade involves many stages. So that made in China iPhone is actually
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assembled from components that are made all over the world. But it doesn't really change the
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fundamentals all that much. There's a recurrent... I mean, the dirty little secret of international
link |
trade conflict is that actually it's not... Conflicts among countries are really not that
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important. Most trade is beneficial to both sides and to both countries, but it has big impacts on
link |
the distribution of income within countries. So the growth of US trade with China has made both
link |
US and China richer, but it's been pretty bad for people who were employed in the North Carolina
link |
furniture industry, who did find that their jobs were displaced by a wave of imports from China.
link |
And so that's where the complexity comes in. Not at all clear to me. We have some real problems
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with China, although they don't really involve trade so much as things like respect for intellectual
link |
property. Not clear that those real problems that we do have with China have anything to do with the
link |
current trade war. The current trade war seems to be driven instead by a fundamentally wrong notion
link |
that when we sell goods to China, that's good, and when we buy goods from China, that's bad. And
link |
that's misunderstanding the whole point. Is trade with China in both directions a good thing?
link |
Yeah, we would be poorer if it wasn't for it. But there are downsides, as there are for any economic
link |
change. It's like any new technology makes us richer, but often hurts some people. Trade with
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China makes us richer, but hurts some people. And I wouldn't undo what has happened, but I wish we
link |
had had a better policy for supporting and compensating the losers from that growth.
link |
So we live in a time of radicalization of political ideas, Twitter mobs, and so on.
link |
And yet here you are in the midst of it, both tweeting and writing in the New York Times articles
link |
with strong opinions, riding this chaotic wave of public discourse. Do you ever hesitate or feel
link |
a tinge of fear for exploring your ideas publicly and unapologetically?
link |
Oh, I feel fear all the time. It's not too hard to imagine scenarios in which this is going to,
link |
you know, I might personally find myself kind of in the crosshairs. And I mean, I am the
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king of hate mail. I get amazing correspondence. Does it affect you?
link |
It did. It did when it started. These days I've developed a very thick skin.
link |
So I don't usually get, in fact, if I don't get a wave of hate mail after a column, then
link |
I've probably wasted that day.
link |
So what do you make of that as a person who's putting ideas out there? If you look at the
link |
history of ideas, the way it works is you write about ideas, you put them out there. But now
link |
when there's so much hate mail, so much division, what advice do you have for yourself and for
link |
others trying to have a discussion about ideas, difficult ideas?
link |
Well, I don't know about advice for others. I mean, for most economists, you know, just
link |
do your research. We can't all be public intellectuals and we shouldn't try to be.
link |
And in fact, I'm glad that I didn't get into this business until I was in my late 40s. I mean,
link |
this is probably best to spend your decades of greatest intellectual flexibility addressing
link |
deep questions, not confronting Twitter mobs. And as for the rest, I think when you're writing
link |
about stuff, the answers like no one's watching, write like nobody's reading. Write what you think
link |
is right. Trying to make it, obviously, trying to make it comprehensible and persuasive. But
link |
don't let yourself get intimidated by the fact that some people are going to say nasty things.
link |
You can't do your job if you are worried about criticism.
link |
Well, I think I speak for a lot of people in saying that I hope that you keep dancing like
link |
nobody's watching on Twitter and New York Times and books. So Paul, it's been an honor. Thank you
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so much for talking to me. Great. Thanks for listening to this conversation with Paul Krugman.
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And thank you to our presenting sponsor Cash App. Download it and use code LexPodcast.
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You'll get $10 and $10 will go to FIRST, an organization that inspires and educates young minds
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to become science and technology innovators of tomorrow. If you enjoy this podcast,
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subscribe on YouTube, give it five stars on Apple Podcast, follow on Spotify, support on Patreon,
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or simply connect with me on Twitter at Lex Friedman. And now, let me leave you with some words
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from Adam Smith in The Wealth of Nations, one of the most influential philosophers and economists
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in our history. It is not from the benevolence of the butcher, the brewer, or the baker that we
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expect our dinner, but from their regard to their own interest. We address ourselves not to their
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humanity, but to their self love and never talk to them of our necessities, but of their advantages.
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Thank you for listening and hope to see you next time.