0:33 Intro. [Recording date: September 16, 2013.] Russ: Our topic for today is your new book, Average is Over. It is, for me, your most thought-provoking book. It outlines a rather daring, and daunting, possible future for America, and the world--a mix of great optimism with, it seems to me, some pessimism. So let's start with the title--"Average is Over." What are you saying with that title? Guest: This is a book about the increase in income inequality in America, and it's trying to trace through that trend and see what it looks like 10, 20 years out: what are the advantages, what are the disadvantages, and what's driving it. So, "average is over" is getting at exactly that increase in inequality of income. Russ: You are really suggesting that there is going to be a bi-modal distribution, though. You are making a much stronger suggestion than just income is going to get less equal. Guest: Well, I think over time a lot of people in the middle class, in fact most of them, think we'll either grow into being quite wealthy, or they will have more stagnant income in the lower-middle class range. So, I think what we thought of as middle class America in, say, the 1960s, will be viewed as a historical anomaly. Lots of people will benefit greatly from this change, but not quite everyone. Russ: So, I think you know I'm somewhat of a skeptic about the inequality data--that I think it's distorted by changes in family structure, immigration, and other factors. And that boils down ultimately to some statistical discussions we don't have to have. But if you are going to push your viewpoint that this is a real trend, an important trend, what do you see as the causal, underlying causal mechanism for this growing inequality? And in particular, the stagnation of the middle and the bottom? So I don't have any trouble with the idea that the highest incomes are going to get higher than they were before relative to the median or the mean--because of globalization, technology, a lot of reasons. But you are saying something much stronger than that. So why do you see that happening? Guest: Well let me first point out that even if you are skeptical about the macro data, there's a lot of micro or sector-specific evidence that inequality is going way up. So, the Harry Potter books, or Da Vinci Code, they earn much, much more than best sellers of the past. But if you look at average advances for authors, those are in fact way down. If you look at the economics profession, at the top end, people like Paul Krugman, Greg Mankiw, again earn much, much more than their predecessors; but there are more adjuncts being hired than tenure track professors. So I think you can look at the economy sector by sector and in most sectors you see some version of this. Russ: Okay, I'm going to challenge that. I don't find that compelling at all. I'll tell you why and see what your response is. So it's true--this is my point about the technology and globalization--it's the argument that Sherwin Rosen and Ed Lazear made in their "Economics of Superstars" paper, that the highest people at the top of their profession, whether it's sports or the arts are going to make a lot more than they used to because of that phenomenon. But your second point is the one I dispute; you said, well, the average advance is going down. I'm not surprised at that. And that's because a lot more people are writing books. So, a lot more people are coming into the distribution, pulling down the average. But the people who would have been there 20 years ago could be making more than they did before. So I think that's a very distorted measure. Guest: Well, I would say, as I often have, that I'm a happiness optimist but a revenue pessimist. So if you look at the total amount of revenue going into authors' advances, again, if you take away that top part of the market, I think that's definitely down. I think you see the same thing in the music sector. But just to turn to the main question I think you wanted to ask me: Two of the driving forces, one of them is simply the Internet and automation and the general rise of a new class of machines connected to computers and smart software. I think those extend the reach of the most productive workers and I would include smart phones and cell phones and better communications in that. So there are many more global markets and the people who are truly talented can sell to more people and sell to them with better marketing. That accounts for some of the increase on the upper end. But at the same time, automation is replacing some jobs. But we don't have the same kind of flexible economy that we've had in many times past. And I think on net you'll see labor force participation rates are falling, so fewer people are working. And thus we are getting a lot of stagnation with the other income classes. The other driving force behind this I think is globalization: that there are pressures which equalize wage rates of labor across countries. So there have been fantastic gains in India, China, as well as many other places, as you know. Much of this is positive-sum, but I think a lot of it is actually zero-sum. And there's a kind of arbitrage applied to the price of labor, as there would be to, say, the price of apples. Russ: So when the price of labor goes down worldwide but up in the places that were low, so-- Guest: That's right. So global inequality is way down; but within virtually every country inequality is very much up. If you look at the United Kingdom or Germany you'll find most of the growth there has been in lower-wage jobs. And again, the typical or median wage of the last 10-12 years has slightly been going down.

6:33 Russ: So, you paint a very interesting, really incredibly interesting vision of how smart machines might change our lives. And we are going to talk about the implications of that. But I think for most people they've only seen the tip of the iceberg. They might use a GPS (Global Positioning System) device in their car or on their smartphone. They might ask Siri on their iPhone for directions or a recommendation for a restaurant or a movie. And that's fun. It's kind of cool. It's not life-changing. But you see some rather extraordinary things coming very soon, when smart devices get married to big data or other types of information technology. Talk about some of the things you see coming. Guest: Driverless cars are coming fairly soon. They basically work now. We need to set up a legal and regulatory environment; that will take a while. But the technology works. This will ease commutes; it will mean cars can drive much faster, spread themselves out more; it will reshape a lot of economic activity. And of course there will be driverless trucks, other kinds of driverless vehicles. This of course will eliminate a lot of jobs, create some others. But it will really be a big change in our lives. The artificial intelligence program Watson is now being applied to medical diagnosis. In less than 5 years and maybe less than 2, this will be online. I think rapidly the price, whatever it is, will fall. And there will be very high-quality medical diagnosis available to a lot of people, no matter where they are located. Even if they are not very well off in terms of income. In general, a lot of the service sector jobs are now being automated; a lot of what legal assistants used to do. It's possible now that you have artificial intelligence programs which can grade essay exams, which is what you and I have spent a chunk of our lives doing. So I think there's been a series of related breakthroughs in smart software which are really going to change the job market. Russ: We have more to say about this; you have a lot to say about it and we'll continue to get into it. But some people--Robin Hanson on EconTalk in the past and Ray Kurzweil--have a very different vision than yours of what this growth in artificial intelligence, machine intelligence, whatever you want to call it, how it might affect our lives. So, quickly lay out their vision and why you dispute it. Guest: Well, the Ray Kurzweil view is within 50 or so years we'll all become computer uploads; our brains will be uploaded into computers. I just find that very, very hard to believe. I think it's a new kind of secular religion. Robin believes that, too. But he also believes that something akin to robots will basically only lower wages, because robots will compete with humans. I would stress much more that humans can always complement robots. I'm not saying every human will be good at this. That's a big part of the problem. But a large number of humans will work very effectively with robots and become far more productive, and this will be one of the driving forces behind that inequality. Russ: We're not just going to be used as an energy source for them, as they suck us dry or whatever. You're not that pessimistic. Guest: No. Again, I think 'pessimistic' and 'optimistic'--they are words everyone in this debate is applying too quickly. I think in this debate the radical thing to do is to write a book which isn't trying to be too normative; just try to think through what will things be like. And by keeping the evaluation at much more of a distance I think we'll actually get further with the analysis. Russ: Yeah. I actually enjoyed that a great deal. It does lull one into thinking you are just describing--it's just a history book that happened to fall into our hands today. So there's a little risk there. But it's very provocative. Guest: I've had people confront me in outraged fashion: How can you accept all of this? But look: as a writer the point is to try to figure it out as best you can, and at the end of the book if one wants to say, let's not go that route, well that's worth a discussion. But the notion that at every intermediate point you have to inject your emotional outrage I think has become one of the worst features of this whole debate. Russ: It cuts across other debates, too, doesn't it? Guest: Absolutely.

11:01 Russ: So let's talk about what you've learned as a chess fan. And you write at some length. At first I was rather taken aback by this, but I grew to find it quite fascinating. You write at some length about the role of machines in chess tournaments, and particularly in freestyle. Talk about that and why it's a nice potential template for future human interaction. Guest: Freestyle is a form of chess where a human teams up with a computer. So, if you play human-and-computer against computer, for the most part human-and-computer, if it's a practiced human, will beat the computer. Even though computers per se are much stronger than humans at chess, it's the team that's stronger than either one. And I think this is a good metaphor for a lot of what our job market future will look like. So there's a big chunk of the book that looks rather closely at freestyle chess and tries to see what we can learn from it. Russ: The thing I found most provocative about that is that the best freestyle teams do not necessarily have the best human players. In fact that could be something of a handicap. Guest: That's right. The really good human players are too tempted to override the computer and substitute in their own judgment. The best freestyle teams, they are quite epistemically modest, the human or humans involved. And what they are really good at is asking questions. So they'll run two or three different computer programs and then just check on where do those programs disagree. And then they'll probe more on those points. And that's what the humans do well that the computers, at least not yet, aren't able to copy. So it's knowing what questions to ask that has become the important human skill in this freestyle endeavor. Russ: So, applying that to the medical diagnosis example you gave earlier, it suggests I don't want the guy or the woman who had the best grades in medical school or the most arrogant--which is often in today's world, can be, the best doctor. I might want the most modest doctor, or not the most modest, but someone who is willing to let the diagnosis provided by the machine be the "right" one. Guest: That's right. So, wisdom and modesty will become much greater epistemic virtues in the future scheme. I think that's overall a good thing. We should revere those qualities more. And we will have to, looking forward. Russ: You also have a lot to say about conscientiousness and advantages that women might have over men. Explain. Guest: Well, one thing we are going to get very good at in the future--you see it now--is just measuring quality. So, whether it's doctors, lawyers, economics professors, there's always a randomized control trial now; there are always numerical ratings. Everything has a Yelp rating or an Amazon rating or something. And we all know these are highly imperfect but basically they are still better than not being informed at all. So it's like in the future there's a credit score for everything. So people who test well young I think will have a lot more invested in them early in their lives, early in their careers; and they'll have a head start. And another way to think of this is, I think, within 5 years the world's best education will be available online and it will be free. Arguably that's already the case. But the question is: Who is there to learn from this? It's the people who are disciplined and conscientious, which is still distinct from just raw intelligence. Now, if you ask the question if you compare men to women on average which group is less conscientious, I think you have to hand that one to the men. At least the lower tail of the distribution. So I think we already see in higher education and many other areas women doing better. And not just better because there is less prejudice. They are just outright doing better and out-competing the men. And I think that trend will be magnified by this increase value for conscientiousness. Russ: Explain again why conscientiousness is going to be more important then than it is now? Guest: There will be many more free resources; and there's already a lot. So the person who is just disciplined enough to sit down and, say, listen to EconTalk podcasts or read blogs or go through Kahn Academy or whatever it is they ought to be doing, that will be there for them free. So, what you'd call the 'shadow value' of conscientiousness in economic terms will be much, much higher. And you see that--students in India, they take Coursera classes and they are brilliant; but they are also really determined to work hard. And they are outperforming in general a lot of these top Stanford students. And that's being measured and picked up. And those people I think will do very well in this new water[?], and that's again a case of conscientiousness paying off. Russ: I guess it's not just the advantage of being disciplined to sit in front of the computer on your own time, but it's also the fact that possibly it will be harder to get somebody to be drilling you and pushing you face to face. Guest: That's right, especially for people with lower incomes. But the free things will be there and the people who are maybe brilliant in some strange way but need to be in the middle of a lot motivation and pushing and peer effects, those people may be worse off. Russ: You have a description in the book of something I thought of as Siri on steroids or Google Glass run wild. You are in a negotiation and your phone vibrates or your glasses send you a signal that says the person is lying and encourages you to kiss your date because temperatures changed and something sensitive that you are wearing or carrying. What I found fascinating about that--I'm a little skeptical about its accuracy but that's okay; some of it's definitely coming. I really was interested in your point about the cultural challenge that we face with these kind of devices. Guest: I think we'll record a lot more than what we are doing; we'll measure a lot more. And again, when your smart phone tells you to kiss your date or whether someone is lying, the point is not that this is perfectly accurate. It just has to be a little bit better than you would do on your own. So, you'll walk into a Whole Foods and your smartphone will tell you: Here are the 5 things on sale. It will tell you, talking to your refrigerator: These are the 3 items to throw out and don't really finish eating. It will give you a lot of advice that will one way or another communicate to you the content of reviews. So it's like going around through life with all of recorded intelligence available at your fingertips. If you are willing to listen. Russ: But you suggest that the cultural transformation might be a little bit challenging for some of us. We might not be so willing to listen. Guest: I think we are all a bit reluctant to become so subservient to computers and to software programming. And those people who are not, those people who can listen yet without losing their sense of self, without losing their inner propulsion, I think that will be a highly propitious mix of character qualities to have. But I think a lot of smart people--again, they'll try to do too much themselves, like some of the lesser freestyle players, and they'll end up getting in a lot of trouble. They'll be out-competed by the wiser and more modest individuals. Russ: Now, most of this sounds pretty great. A lot of what you are talking about is going to make life more fun. Maybe more silly. Maybe more gadget-centric. But a lot of it is just going to be pleasant. Guest: Like GPS. It's mostly an advantage. It's not perfect. Russ: Right. Occasionally it takes you down a one-way street. Or takes you on a detour that was not necessary but somehow it thinks it is. Or roads have changed. All those things are going to happen, and as you point out, there will be a little bit of an arms race. The person who wants to lie, maybe wearing a bag of ice on them somewhere to keep their temperature down. Or there will be ways that their phone will chill them. Whatever. We don't know what will actually happen. There may be all kinds of interesting market forces at work in these equilibria. We don't know how it will actually pan out. But most of these things are really great. As you go by the movie theater it says: You'll like this one. Or whatever the things that are there. Guest: There's something oppressive about it. Because all the mistakes you make get recorded; they get measured. And we're not used to that. We're used to a lot of things being overlooked. Like I give the example of a guy who is on a date with a woman. And like he's a nice guy, but he just smiles a bit too long at the waitress, and her smartphone tells her that afterwards. Russ: The date, not the waitress. Guest: So the whole thing's against people and we're going to have to back out of that much more. I don't think that will be so easy. Russ: I agree with that. We see it happening now. Guest: One wrong Tweet and you get in a lot of trouble.

19:54 Russ: Yep. You make a fool of yourself; you lose your job. But the point I'm trying to make is those things are all--I think it's an incredibly interesting time to be alive and I think the health applications are going to be mind-boggling. And the driverless car might save 35,000 lives, potentially, if it's done well, and allow us to get places faster while saving lives. Those are just wonderful, glorious things. The average-is-over part of the book, though, is not so attractive. Who are the people who are going to lose from this technology? These advances in technology? Who are the losers and why do you think they are numerous? Guest: Say that right now you are someone who is a truck driver, which often is a reasonably well-paying job. You don't get rich doing it, but you are not lower middle class if you have a good truck-driving job. And over time all of these vehicles become self-driving. We'll see more and more workers basically crowded into service sectors. There will be more people trying to do things like be yoga instructors or be personal servants. And as those kinds of jobs grow, I don't see the corresponding wage growth. I think there will be a fair amount of stagnation, basically in service sectors for people who are not extremely well educated at working with technical material or computers. Russ: Well, I guess the issue would be, you'd think the demand for a really good yoga instructor would go up, from these very wealthy people who would have all these great productivity enhancements. So I think the question is: Will you not even need a yoga instructor because your phone will tell you, or your Google Glass will tell you what posture to be in and show you a 3-D hologram of it in front of you. So it's even better than a yoga instructor. In fact, as you said, it will tell you when you did it wrong. You'll be talking to the cameras in the room and it will give you advice on how to do it better the next time. Which the yoga instructor may struggle to do in a room of 20 students. If that's the future, where the yoga instructor can't make a living, I agree with you. You suggest at one point that really rich people like to be fawned over and complimented; and people who are good at that will be able to make a living, for sure. But that's very depressing. Most of the tasks that really wealthy people used to pay for, they don't pay for any more. They don't have to have a cook because they can do take-out. Take-out is cheap now. They don't have to have a dish washer--a person who washes dishes--because they have a dishwasher. We all are rich that way. That's great. That's been the glorious transformation of the middle class, not only of the upper class. But you are suggesting that that's going to come to an end. Guest: Well, I think there will be a lot more jobs in service and restaurant sectors, but except at the very top, I don't think those jobs will pay so well. There is a lot of competition to do them. Indirectly there's competition from overseas, which will only get stronger. So I don't see significantly rising wages in those sectors. And I see more workers flowing into them because of these other jobs' disappearing. So that's the downside, in my view. But let me just note, I think there's some much longer term, which I'm not trying to forecast in the book, but say, 50-70 years out, where you get enough neat, new stuff that's almost like scarcity isn't there any more. So I think that the very long-term picture is quite utopian. But you know, go back and look at the Industrial Revolution. Let's say that starts in the 1770s or 1780s. In England real wages are not going up at a high pace until the 1840s. So there's there 50-70 years of transition, where even free market economists like David Ricardo are writing about the machinery question and then worried about this. Russ: But it turned out okay. Guest: Well, I guess after 50-70 years. And I think 50-70 years out, our own scenario will be much more utopia than dystopia. But, say, 20-30 years out, I think is much more mixed. Russ: And that's where Robin Hanson disagrees with you, I guess. He argues that the 50-70 year scenario is even worse. Guest: Well, he doesn't think it's bad. He thinks we're all computer uploads earning subsistence, but there's a lot of us that are just fine. I'm not sure how to adjudicate that ethically. But it's fair to say most people don't like the idea when they hear it, right? Russ: No, they don't. Guest: But Robin thinks that's great. Russ: I didn't realize that. Guest: He does. Russ: Oh, okay. Guest: That is utopian for him. Russ: Maybe that's what he'll get. Maybe it will be a choice in the world, but maybe the rest of us will be able to do something different.

24:44 Russ: One area you do see a lot of potential for is coaching and marketing. Explain first what you mean by marketing. You don't mean what I think what everybody else might mean by it. So, talk about what you mean by marketing and coaching and why they are both likely to be very useful. Guest: Coaching and marketing, they are both forms of motivation, and one thing I think computers are not good at is motivating us. So you can write a program to send yourself text messages and that does a bit, but what really motivates us is what inspires us, human role models, examples, stories, narratives--things that are quite powerful emotionally. Teachers we met when we were young. And I think those will be big growth sectors. And in terms of marketing, imagine, say, that 20% of America is millionaires or even richer. There will just be that much more competition for their attention, because attention is still scarce. But they'll have a lot more money. So in competing for their attention, basically in different ways we'll all be doing more marketing. And I see marketing as really the single biggest growth sector of the future, viewed in these somewhat unusual terms. Russ: Of course, we're all marketing these days in all kinds of unusual ways already. Because attention is scarce. Guest: That's right. And that will become more scarce, because the number of hours in a day will not really go up. Russ: And the two eyes problem--you only have two. Awkward. You can't see behind you. Guest: You'll get that extra hour in your driverless car. So in that sense we'll augment the supply of attention somewhat. But I think the supply of goods and services will outrace that effect. Russ: I agree with that. Let's talk about games. You have some interesting things to say about games and the application toward education. Guest: Well, if you ask in what sphere of modern life has education really succeeded, I think it's gaming. These games are incredibly complex. When I look at them I feel they are too complicated for me; I could never learn them. But the people who are interested--the game itself teaches people how to play. It's all done by software and very often online. And it seems it really works. They teach you in steps. They make it hard enough to be interesting but easy enough that you feel you are making progress. And in my view the big educational breakthrough has already come with games. It's just a question of how do we apply that to educating everyone else to do other things. And we're far behind on that. Russ: What are some of the ways that might be applied? Guest: Imagine an intro to economics textbook but structured more like a game, where you move on to different levels and maybe you capture pieces or you acquire points. And there's a competitive angle. And I'm not saying everyone has to do it that way. But I think there's really a big chunk of people who get interested in games, who would otherwise, say, never be interested in medieval history or battles or whatever else, but the games get the interested. And I think that's a big frontier for education, where we've actually solved the problem. We don't quite even know we've done it yet. Now we just need to apply what we've already learned. Russ: And do you think that's coming? You've alluded to a number of successful, moderately successful--it's early--online educational activities: Coursera, the Kahn Academy; and EconTalk. Do you think EconTalk as a game would do better? Guest: I'm not sure how we would make EconTalk into a game. You could make the testing of it into a game. But if you think of big intro courses in subjects like English, economics, where a lot of people take them, I don't see why it isn't profit-maximizing to have a gamified version of those classes. Which may be, you know, a third of students who choose to opt for it; and they do it as a game. And I think they would learn the material very well with a lot of immediate feedback. And enjoy it a lot more. So, yes, I think we will do that, pretty soon. Russ: A lot of people would say that undergraduate education is a game: the grading system and how you pick your classes and how you pick your professors is a game. But you are talking about something a lot more--gamey. Guest: Yeah; that's gaming it to be easy or to be a kind of fraud. This would be an actual true game. As chess is a game, or World of Warcraft is a game. And you actually play it in your spare time, which has now become your study time. And that's what keeps you interested, is the competitive and gaming aspect. Russ: Although I agree with you that you learn something about medieval life from some of these games, warfare, violence, strategy and so on, it's not obvious to me that you could turn your intro Literature class or Econ class into a game. I think that's part of the reason it hasn't happened; it's not the only reason; obviously there's a lot of other entrenched forces. And you sound very Smithian in the book about your view of the education industry, just as he did in the Wealth of Nations. He has some not-so-positive things to say about the vested interests of professors. But I suspect that's going to be challenging. Guest: Yeah; a top-level game together, private companies, might spend $200 million on it, which is really a lot. Now, are companies right now ready to spend $200 million creating a gamified version of, say, an Introduction to Calculus class? I think until they know it will be accredited and accepted, they are reluctant. But I do see the gains from trade there, and I think there will be multiple ways of learning all of these topics, which will compete with each other. Probably no one will win out; different people learn according to different styles. But I think the main styles will be turned into reality. There will be like Kahn Academy style, there will be gamified style. There will just be narrative chat style; there will be listen-to-podcast style. And so on. Russ: Yeah, I agree with that.

30:52 Russ: Talk about the future of economics teaching generally. And the profession. You have a section on that. Talk about what you think is coming. Guest: As you know, in the United States, what--70-80% of students go to state universities of some kind. And really most of those institutions feel squeezed by budget. So the idea that each of these schools will support a full line of tenure track faculty I think is coming to an end. I think the top schools will--the top schools will do more; they'll fund more superstars. But again, there will be this thinning out. I think in some ways this will damage research. It will be harder to be a successful researcher in the middle of the sector. I think there will be demand for professors to teach much more. A professor will work in conjunction with online programs, and the people who are the best teachers will not necessarily be those who know the most economics but will be more like tutors. Like, what can you do to motivate your students to spend time with those online programs? And you see this already in Hong Kong and in South Korea. There's a very active private tutoring sector, and the best tutors can earn millions of dollars a year selling their services. And again, they are not Nobel Prize winners. They are geniuses at motivation. Russ: That's a huge part, I think, of high school education certainly is the ability to motivate adolescents to stay focused. I think that's a huge part of why face-to-face in high school is still necessary to some degree. And only the most dedicated and conscientious students are going to be able to take online classes in their entirety. And there also are going to be superstars who present the material, who do the online classes. Those people are going to make a lot of money--great teachers/tutors are going to make a lot of money. The beautiful thing, to me, is that there won't be as many of them and the average quality will be much higher. Than what we have now. Guest: I agree with that. Russ: But at one point you talk about the role of empiricism in economics. I don't have the exact quote at my fingertips, but you talk something about the typical good economics paper of 2013--you see economics potentially moving, and you see it has already moved, into a very different mix of theory and empiricism. Describe it. Guest: In my view there aren't really any new theories left in economics. I don't think we'll discover it 20 years or 5 years down the road. I think we have most of the core theoretical ideas. We can argue about their relative importance. But great papers today are mostly: What data set did you find? They are not from mining or re-mining the available data sets. That's already been done to death. It's people working in areas like development economics finding or creating their own data and then doing something creative with it. But this I think will continue. I think also finding data sets is something machines cannot do very readily. So that will remain the province of humans for the foreseeable future. And we'll have a completely empirical profession. And I see already in young graduate students--a lot of them, they just don't learn standard old-line, like Chicago school, UCLA microeconomics. It's a kind of dying art. Russ: I agree. The question is what is replacing it. Which is--I'll quote an unnamed professor who told me that when he studies the labor market he doesn't have any pre-conceived theories; he just listens to the data. He concludes whatever the data concludes. So, it's theory-free, but 'it's better,' because it's just what the numbers say. And I find that an untenable vision. Because the numbers are very loud and cacophonous and they say whatever we want them to say. When I think of the best economics paper of 2013, you are going to say it uses a new data set. I'm not sure we are making a lot of progress. You are much more optimistic than I am about, say, macroeconomic stabilization policy and our ability to access, using data, better policies in the future rather than using better theories. You think the data are going to get us there. You want to try to defend that? Guest: Well, I share a lot of your worries. I think we've already moved to around what I call 'common sense theory' is strongly undervalued. What's valued is intricate theory, which I think is often of quite low marginal value. And the notion that the empiricists will just run wild, that worries me, as it worries you. But that also said, I think there's something called 'big data' coming. I think we'll learn a fair amount from it. I'd like to see what we learned filtered more by common sense theory than what we are likely to do. I think macroeconomics, we've actually learned a lot of the key insights. It's just people are never that happy with the stabilization program because there are big losers in recessions and depressions. But I think a lot of countries are responding pretty well to their crises. In part the problem is it's just not always possible to do better. Russ: Well, I agree with that.

36:16 Russ: I do feel you give insufficient shrift--which is a word I've never used without 'short' in front of it--short shrift to the knowledge problem that Hayek identified. To the causal density that Jim Manzi talked about on EconTalk. For example you talk about: I'll go pick a lawyer, I'll be hiring a lawyer and my smartphone or device will tell me what grades this person earned in law school, the quality of their law school, their success rate in trial. But those things don't tell us very much. Those aren't very helpful. It's like when hospitals publish their success rates--sometimes against their will. We all understand that if they have difficult cases then their success rate is not a good measure of their quality. You think we're going to be able to parse all that out and independently control for all those factors? Guest: Well, to what extent? Keep in mind that every client and every case will have its own metric of quality. So, if you lose a lot of cases taking on poor people accused of being murderers when the gun was found on the site with their fingerprints, those cases get graded too. And your marks are adjusted for that. But again, you don't have to believe these grades will be extremely reliable, any more than credit scores are. You just have to think they are better than not really knowing anything. So, the grade will be supplemented with personal recommendations. We already use personal recommendations. And I think the grades will be viewed and are viewed, like Yelp reviews, Amazon reviews sell books, as being informative. And I think down the path of this world where everything is graded. But no, I don't think it's all going to be that accurate. That's one of my worries, actually. Russ: What's Google doing to our brains? Guest: With Google it's easier to forget things, as long as you know how to find them. I find, in the case of myself, that's how I operate. I remember fewer facts, but I've really honed my ability to define the right keywords. Russ: Do you think that's a real phenomenon? Guest: You mean affecting a lot of people? Russ: Yeah. It's true for you. I still know Ty Cobb's batting average. 367. Guest: 367. Russ: I'm stuck with that. I can't get rid of it. I'd love to--I'd really like to forget it; I'd like to make room for something more useful. When I was 17 or 14 I thought it was extremely important. And I'm stuck with it now. So, do I really have that kind of control, to forget stuff? Guest: You and I have this privileged position of spanning two different human cultures--pre-Internet and post-Internet. And that's actually fantastic, and I think we'll go down in history for a kind of richness of our vision, because we've lived in both worlds. But I think looking forward there will be many fewer people who have it stuck in their minds as the two of us do that Ty Cobb hit 367. Russ: You don't think my kids are going to remember it? Guest: I think they will remember fewer things. They may remember that one. But they'll be much better at finding information than either of us. Russ: One thing you didn't talk about in the book is books. I think about this a lot. I went the other day and I gave away, I don't know, maybe 200 books to the Friends of the local library, the organization that's a fundraiser for the library. I felt better doing that than throwing them out. But I have too many books. Like you, I get lots of books, still. People send me books. Increasingly they are digital. But people still send me physical books. And I oscillate between thinking: Why do I have any physical books, and between thinking: Oh, I miss them so much already. And I have hundreds and hundreds still. Maybe a few thousand all together. I've culled my collection very modestly. But I'm in this in-between era that you are talking about. I've got this still love of the physical and I have this love of the Kindle. And my iPad. So, what do you think is going to happen there? Do you think books are going to die out? Physical books? Guest: I don't think they'll die. And even vinyl LPs (Long Play records) have not died. They are making somewhat of a comeback. But I do think there will be a big generational shift away from the physical product. There will be a general decline of stuff, including the desire to own a home of your own. And we see this in the data--lower rates of household formation, lower rates of owning stuff. And I think we will be viewed as this group of transitional people who were lucky enough to acquire a love of both worlds. Russ: Time out. Now, I have fewer books, maybe. Actually I don't. It's just that the rate of growth is slowing. I probably have more books than I had a year ago. But I have a lot more devices. I have an iPhone, an iPad, a MacBook Air, and a MacBook Pro. I'm not particularly proud of that. And I've got some leftover ones from the past, just like the books I've finished. These devices are sitting around; they are being used by my kids; they are sometimes just decorating my basement; I have a Mac Classic down there from 1984 that I can't bear to throw away. You think people are getting rid of stuff? They are getting rid of books; I don't think they are getting rid of stuff. Guest: Well, what we see in collectibles markets is that overall the prices of collectibles have fallen after the advent of e-Bay. That to me suggests a net desire to get rid of stuff, because to get people to hold the same stock--you are reselling them at lower prices. Russ: Yep. Guest: And I think your children will not own as many books as you do. And Yana will not read as many physical books as I do--not close to it. And she reads a lot. Russ: Well, my daughter is a bit of a rebel. She still eagerly acquires physical books, and I sometimes have to carry them out to the car in her suitcase. It's awkward. But I think you're right. I think the next generation, and next two, are going to be very, very different in how they--they obviously are already--consume their information. Guest: I went to Best Buy one day ago and I wanted to buy a CD player. I assumed they would have it. They don't sell CD players to put into a stereo system. I was shocked. Call me naive. Russ: And so you had to find it online somewhere? Guest: Correct. Russ: It's still there. Like you said. You can still get it. And it's reasonable. It's not like buying a new typewriter. I don't even know if you can buy a new one. You probably can. But there are lots of used ones. You can find them. And so you are able to still buy one. But they are not extinct. They are just scarce.

43:21 Guest: But the way we will use physical space in our cities is really going to change. There will be much more about entertainment and looking good. And I think you see a lot of scientists already saying Manhattan. Or San Francisco. Russ: As opposed to what? You said 'looking good,' 'entertaining.' Hasn't that always been the point of a house? Guest: Well, cities. Cities used to have more manufacturing. The 20th century city also is a big home for poor people. And I think 50 years from now we'll look back on that and be shocked at the notion that so many poor people got to live in Manhattan, Los Angeles, wherever we are talking about. Because in the future they will be in other places with lower rents. Russ: Why don't you talk about that? It's an interesting idea; I'm a little skeptical of it. Talk about your view on the world's most livable cities and where you think population distribution is going in the world of Average is Over. Guest: What I see in the data is that wealthy people want to live in really nice cities. That they are capable of gentrifying them. A city like Washington, D.C. has gotten much nicer. And that pace if anything seems to be accelerating. People of lower income are moving out; they are going to the Carolinas or wherever. They are doing fine; it gets a lot of them out of high-crime areas. It seems to me to be a better outcome for virtually everyone. The cities are much more expensive, even though real estate as a whole is kind of a flat-line investment, you look at quality coastal property and we are passing the previous peaks of right before when the housing bubble passed. So we are not producing any more of that land; you and I would probably agree we should deregulate it; you and I would probably agree we are not about to do that. We are not even going to deregulate Fairfax land supply. So that stuff gets more expensive, wealthier, gentrified; and poorer people will move more to the South, the Midwest, Texas, Oklahoma. And I think there will be a much more geographic segregation in the United States. And elsewhere. Russ: Talk about the Texas phenomenon and the relationship between size of government, government services, cost of living, and mobility. Because you have some interesting things to say. Guest: Well I think one way to get a glimpse into the future is just to ask: Where is it that people want to move today? Now I'm not saying those movers are representative of all Americans. But still you see a net tendency. And the state attracting the most migrants is Texas. Three of the five fastest-growing cities in the United States are in Texas. And you might ask: What does Texas have? Does it have great weather? great wealth? Probably not. Crime rates are mixed, but they are not great. Public services are probably below average. But they have a fair number of jobs and really cheap housing. And that suggests to me what people really, really like is cash in their pocket which they are in control of spending. And I know a paternalist may disagree with that. I'm not trying to judge this normatively. But for the future I predict we'll see more of that: people moving to get more cash in their pockets. Russ: Which goes against, I think, the way we think about migration. We think about moving to Manhattan, Washington, D.C., San Francisco for either the work climate or air--the physical climate--or the beach. Most of these--I said the work climate--that was a bad example. But a lot of non-monetary intangible benefits. You are saying that a lot of it is going to be monetary. That's going to drive where people want to live. Because of the cost of housing. Guest: Of course. And the elderly migration is the next big story. And the average old person--you know, their net wealth in the United States when you take away the house they own is well below $100,000. So they will want to live in cheaper areas, for the most part. And as long as these cheaper areas have an okay hospital, I think you are going to see a great deal of migration to them by the elderly. Russ: Well, you are correct to point out the importance of that because there are going to be a lot more elderly people. Guest: And budgets will be squeezed. The Federal budget will be squeezed; private budgets. Russ: But they are willing to pay a premium to be where it's warm. They tend not to move to Buffalo, NY and Duluth, MN. Obviously there's a tradeoff. They tend now to move in large numbers to expensive places, not cheap ones. Guest: But a lot of America's warmest real estate is also low cost. Places like Oklahoma are pretty warm; places like Alabama. Parts of the Carolinas. And those areas are seeing considerable influxes. So not everyone can move to Newport Beach. Of course, maybe everyone wants to. Russ: The entry price there is different. And of course, as you point out in the book, one of the reasons Texas is growing quickly is it--certainly Houston doesn't have the zoning restrictions other places have. That means that the real estate doesn't get bid up as much when people try to move there. Guest: I think we'll just see a lot more effective economization. So, wages and measured wealth will become less accurate as real indicators of wellbeing. We'll just see a lot more variations in terms of the costs people face and the benefits they derive from the Internet. So think of it as a kind of ethical view similar to a lot of religions, where we've said for centuries: Well, money isn't the main thing; it's the values you have and how you treat people and how you take advantage of what you've got. Very corny stuff. But it's true, and I think it's going to become a lot more true. Russ: Why isn't it more true already? I agree with you that these are universally important things, that money is overrated, things are overrated. And yet you are suggesting--it's like when people talk about the budget issues at the national level. And we'll get into those in a minute. People say, oh, states are running out of money, or the Federal government is running out of money. They spend a lot more than they used to. So to suggest that there's some crisis coming that's going to force people out into Oklahoma in greater numbers that used to go to California and Florida--I don't see why. What's going to precipitate that? Guest: Well, your general question: as you know, long-run elasticities are always greater than short-run elasticities. So, in the longer run there's always more adjustment and adjustment matters more. But I think also the world now is changing more rapidly again. So there are a lot of changes that have come along. A lot of them cued or indicated by the financial crisis. And we're just starting to adjust to those. I call it sometimes the Great Reset. But we're not close to being done with those adjustments. Now with state budgets, that's all about Medicaid. So, health care costs more; they spend more. But I think other stuff is getting crowded out, like higher education. Russ: Sorry to press you on this on short notice, but what do you think has happened to total spending on education at the state level in the last 20 years? You think it's down? You think it's crowded out by Medicaid? Guest: It really depends what number you take, not over the last 20 years but over the last 5 years, a lot of systems have seen very large cuts. And those will continue. Russ: Well, I think that's recession-driven. I'm not sure that's permanent. Guest: In my view it's mostly permanent. Not in every state. And the U. of North Dakota is probably going to get a whole lot better. But overall, you look at the U. of California system, in relative terms that's been declining relative to say budgets at private schools. State aid to that has been declining in absolute terms. Also in Virginia there have been and will be cutbacks in terms of percentage of the state university's budget which comes from the state. So the old average of over 30% will probably end up within 5 years as being 10-15%. Russ: I'm just raising the possibility that it's not Medicaid so far that's pushing those numbers out, but rather expanding access actually for many, many larger numbers of people. Guest: Oh, sure. That, too.

51:35 Russ: Let's turn to the politics of the future and this greater inequality you have. You don't think the revolution is coming. Guest: I don't. I know we'll be much older, and old people are less likely to rebel. But they love to vote for law-and-order candidates. Russ: Yeah, I love that. That's a great insight. It's undeniably true. Guest: Inequality is way up, at least according to the numbers I look at; and crime is way down. And an awful lot of people have a hard time accounting for both of those things being true. Russ: They expect people to be on the barricades. Guest: That's right. What people resent are the people who are close to them--their colleagues, people they went to high school with, in-laws. For the most part, Americans do not resent the wealthy. Russ: Academics do, I think. And you suggest so as well. Explain why. Guest: I'm not sure I know why, but it's as if there are two worldviews competing. One worldview is: the richest people deserve more status. And the other worldview is: the most academically smart people deserve more status. And there's a clash there. So that is kind of a local rivalry. But for ordinary Americans like the home of envy is Facebook. Russ: Explain. Guest: That's where envy blossoms. You look at the people you grew up with, the people you know, you see how well they are doing; if they are doing better than you, you feel bad. That's what I observe. You're not worried about the Titans of Silicon Valley--you know, he earned another billion, I hate that guy. I don't see much of that. Russ: I like your point about people who worry about inequality as being a threat to the safety of the country: that if the 1% keep oppressing the 99%, violence is inevitable. You point out why not, part of it the age factor and part of it as you say, people don't seem to be so concerned about the faceless 1% rather than the 1% near them, wherever they might be. But you also suggested that maybe the people who are claiming this really aren't so worried about it. If they were, they'd have a different focus. They'd be trying to discourage people from worrying about it, and they don't. They go the other way. Guest: Exactly. It's as if they are egging them on. Like, Worry about this, worry about this. Russ: Yeah. Well, I think that is part of it. I think part of the reason we think we have an inequality problem is we spend a lot of time telling people we have one. So they start to think it's true. And as you point out, I think people look at the people around them, and in fact--they like rich people who aren't near them. They love looking at, reading about Bill Gates's house and the lifestyles of the rich and famous. They don't find--it doesn't enrage them. They find it entertaining. Guest: Sure. I think we have a quite genuine jobs problem, and to some extent an income problem; and those can get mislabeled as inequality problems. Because it sounds like a similar phenomenon. But conceptually they are quite distinct. Russ: Yeah. I think it's important to keep them separate.