0:33 Intro. [Recording date: January 12, 2016.] Russ: We're going to start our conversation talking about a recent blog post of yours on the appropriate roles for government and business. And, you made the point, echoing someone else, that we seem to be getting their roles confused. Explain what you meant. Guest: Well, the comment was based a little bit on a quotation that I've used in class and I have up on my door every now and then, from an old newspaper editor named Donald Kaul. And Kaul said, 'We have come to rely upon capitalism for justice and the government for economic stimulation, precisely the opposite of what reason would suggest.' And this is the line I like; he said, 'Capitalism does not produce justice, any more than knife fights do. It produces winners and energy and growth. It is the job of government to channel that energy and growth into socially useful avenues, without stifling what it seeks to channel. That's the basic problem of our form of government: how to achieve a balance between economic vitality and justice. It is a problem that we increasingly ignore.' And I guess what struck me about that, the reason I use it in class, is it just seems to me that often when people talk about growth, the first thing they talk about is not the role of the private sector or firms. They talk about how the government can give us growth, through tax cuts or spending increases or the Federal Reserve. When they talk about fairness and justice, they don't talk about the government doing that. They talk about how companies ought to provide fairness and justice in wages and health care and benefits and all sorts of things. So it seems to me that our social conversation about those things is topsy turvy. Russ: So, let's take them one at a time. Let's start with the government side. Right now, the economy is limping along. It's doing okay: the last job report actually was pretty good. But it's been a disappointing recovery from 2008. It was--the Recession ended but we did not get the robust growth in either output or employment that often follows large recessions. So a lot of people have been very disappointed and think we ought to do something about that. Are you suggesting that that's unlikely to happen? unlikely to be effective? Or are you suggesting it's just not possible? Guest: Sure. Well, there's a long-standing distinction between countercyclical policy, where you are doing because there is a recession, and the long term of what you are doing to build longer-term growth over a period of decades or more. That, the bounceback out of the Recession has been [?] sluggish and soggy and we never really have gotten the quick bounceback that we often have expected--people used to talk about V-shaped recessions where you sort of dropped down and bounced back. But the last few recessions have been soft and sluggish, and they've been what we call sometimes 'jobless recoveries,' where job growth has been slow to resume. So, I tend to take I think this middle-of-the-road view, that when you are in the middle of a recession, surely there is a role for the government to do some things like run a large budget deficit, do some extra spending, do some tax cuts; there's a role for the Federal Reserve to reduce interest rates; all in the name of helping to get you out of the recession. But once you are out of the recession, and now unemployment is down to 5%, I don't think the government is going to be what pushes us forward at this point. At this point, even though things aren't what we'd like to be or haven't happened at the pace we'd like them to be at, I don't think long-term prosperity is going to be built on low interest rates and high government spending. In the long run, prosperity is going to be built on the actions of firms creating new products and goods and services. Russ: Innovation obviously, or productivity are the normal places that we expect longer-term growth to come from. The growth rate--we are technically out of the Recession now for 7 years. I think the summer of 2009 was the technical end of it. And so this is the new normal. And a lot of people find it disappointing, and so they do--they want something more. Politicians are pressured to create something more. So, a lot of people argue we need to subsidize innovation or other sectors, certain sectors of the economy. What do you think of that? Guest: I of course think there's good economic arguments for the government to support scientific research, and Research and Development. But I think the underlying tough question here is what in the business literature they call core competency. You have to think about what you are good at. And what companies tend to be good at, at the most basic level, is: How do you produce something? How do you transform something? And how to tweak it and change it and deal with costs and characteristics of whatever it is you are doing in a way that you can sell it. That's what companies have as their core competency. And of course companies are sometimes tempted to do things like take advantage of people or commit fraud or emit pollution or other things. And there's a role for government in those things. But the real core competency of companies is to push[?] from that side. And the real core competency of government on the other side, it seems to me, is that it can collect money; it's good at collecting money from people who don't necessarily want to pay; it's good at writing checks; and it's good at setting up a set of rules and then at some level enforcing those rules. But it's not necessarily good, and often isn't good at all, at the process of, at an intimate small level, making stuff, changing stuff, transforming stuff, and providing services to people. So I think that the trick is to draw the line between those two. It's not that government doesn't have a role in some things like encouraging Research & Development; I actually am a supporter of the idea that we should think seriously over time about doubling our government support of research and development or more. But, when the government says, 'We're going to start--we are going to heavily subsidize a solar energy company,' it doesn't tend to work out well. And even closer examples, like, think of the TSA, the Transportation Security Administration, at the airports and so on. I would much, much prefer the old days where those were run by private companies and the job of the government was to set rules and go in there and try to beat the system and check out how well they were doing. Because now, you sort of have government enforcing government workers; and the government workers aren't going to be fired. Their administrators aren't going to be fired. So you have this situation of the government trying to provide a service. Which isn't what it does best.

8:00 Russ: So, let me--I want to push back on part of that, or try to get you to clarify it a little bit or flesh it out a little bit more. Somebody actually coincidentally wrote me yesterday asking if I thought the government had an important role to play in R&D (Research and Development). And I responded with a rhetorical question which was, if you think it would do it well? And of course there's a theoretical argument for why basic research is best done by the government rather than a private firm. There's not always a return to private research that's captured by the person doing the research; and so there's an argument that it's a public good that should be provided by the government. The challenge is the incentives the government faces in providing that public good or the research and development funding. So, I certainly understand the argument. The question is: Just as there is a problem with government services being provided--they may not do it so well; the incentives are troubling; the ability to fire is difficult--politicians and administrators tend to follow incentives. And you and I might imagine a government budget that was spent on R&D that might advance the world's knowledge. But it's not necessarily going to be the case that that will actually be what the government does with the money. So, have you thought at all about how that might be structured to avoid those kind of problems? Guest: Sure. Of course. And I think that's a good, reasonable set of concerns. And I'm under no illusion that government actions when subsidies are handed out will be governed by, I don't know, some perfect Aristotelian notion of great science. It's going to happen through a political process. But that said, there are, I think, better and worse ways of doing it. There are, for example, lots of government grants are given out through competitive processes where people have to submit grant applications and they compete to some extent against each other. There's others where they set up a contest for a robotic car or a certain kind of battery or a certain kind of pharmaceutical; and the winner of the contest receives a certain amount. I think that some of the government labs have a reasonable record--perhaps a better record than I necessarily would have expected, at doing direct science. So I wouldn't rule that out, either. But I think that if you--I think that where your point really kicks in hard is, it's easy to point to certain areas of research. You know, right now it's energy technology, but sometimes it's a certain health condition or a certain health thing where for that moment, that's in the news, so that gets lots and lots of grants. And you look around and you think, 'Well, what about this other health thing? What about this other technology, other approach?' And it doesn't seem to be getting much. And I guess my answer there is: 'I'm not worried about overspending on things. I'm worried about underspending.' So I'd rather see more in some categories even if I--again, I'd like to see more in lots of categories. Russ: Yeah. The only thing I would add to that--and it's a good point--the only thing I would add is that, of course, the private sector--there are prizes already out there for, say, a better battery. If you could develop a battery that improved the life of your cell phone's battery by 50% or even 20%, you can make a huge amount of money. Guest: Absolutely. Russ: So, those prizes are out there. The question is are there prizes that aren't being offered? And then you might ask: Well, should we offer that prize, if it's not being offered by the private sector? If the natural returns aren't there. And that's always a challenge. Guest: Yeah. I think it's a really difficult question. I guess what I would say about private companies having that kind of a return is that, private companies are of course not just one company, but it's a weird network of companies. And one of the things we've seen a lot of in the last 20 or 30 years, if you go back a few decades: Giant companies like the old AT&T (American Telegraph and Telephone) or DuPont or others, used to have enormous internal R&D laboratories where they developed stuff. And over time, a lot of those companies either didn't do so well or in the case of AT&T got broken up. And so now what seems to happen is that tiny little companies come along with an R&D idea, and they are sort of funded by venture capitalists or angel investors. And what they are hoping to do is hit that home run, as you described. And if they hit that home run, then they'll be bought out by one of the big boys. And so a lot of the big companies have in a weird way outsourced their R&D. And they are hoping to jump in at the key moment when something has an appropriate proof of concept or an appropriate, you know, demonstration that it really works. And so, when I look at that network, I guess I am underconfident that that network provides a sufficient level of support for all the different ideas that might be out there. I agree it doesn't have to direct government support for those. I mean, I think sometimes there are ways in which there's tax treatment of R&D and other things that can make a real difference, too.

13:16 Russ: It's a great point though about the large firms, because it reminds me of sort of--I think of two forces at work there, which I hadn't thought of before but your comment sparks a thought. Which is: The pharmaceutical industry--pharmaceutical companies, there are very few of them; they are very large; and their R&D--there's a lot of R&D; it depends on how you define R&D--but a lot of their new products do come from smaller pharmaceutical companies. And they get bought up--not the companies themselves necessarily but the idea is certainly the rights to the new drug. And what's going on there is a couple of things. One part is I think the phenomenon that I think you're alluding to, which is: Sometimes it's just inefficient to have a large internal R&D effort, because it's just hard to monitor it; it's hard to spur it, to do great work; it gets a little bit bureaucratic. Guest: In a way it's all the problems with government, R&D brought into a company. Russ: Correct. I'm certainly capable of romanticizing capitalism and the innovative talent of the private sector. But certainly large companies can get fossilized a little bit. So, one reason for outsourcing that is that you get lots of competition among those small firms desperate to hit that home run. But the other reason is that the small firms can't compete with the larger firms in certain areas because of fixed costs--in the case of pharmaceuticals with complying with FDA (Food and Drug Administration) requirements. So, the testing requirements of the FDA are so large and so expensive, small firms can't afford it. So they outsource that part to the larger company. The larger company becomes--for better or for worse, their specialty is compliance. Guest: That's right. Their specialty is taking it to scale. Russ: Yeah. Guest: Which means, in pharmaceuticals, getting through the government barriers. Russ: And so, it's just an interesting point. I don't think--it's not all that. That's not the only reason. I do think there's this economic, what you might think of as a Coasean incentive to outsource that and to not have that be internal to part of the firm. But those two things working together in a place like pharmaceutical make is such that--I think, and I'm not 100% sure of this, and I'm sure my listeners will correct me--but I think a lot of new, innovative drugs come from smaller outfits rather than the giants. That's my impression. Or at least some do. Guest: I think it's not even just drugs, but I think lots of software things or games or, you know, technological developments in the electronic industry in general come out of smaller shops. And then they sort of work their way up. And as you say, get bought up and absorbed. And big companies in a way can be thought of as the companies that put it all together rather than the companies that start from the basic science. Russ: And they have the marketing expertise; they have the scale, as you talked about. Of course, different firms try different approaches. Apple, which has an enormous amount of cash--probably less today than it had a little while ago, but--they have a lot of cash. And you'd think they could--they have a huge internal set of software engineers and designers and other skills. And they spend a lot of money on that. But they could spend an enormously larger amount. They choose not to. They'll often buy technologies that they like. They come along. Whereas I feel like a company like Google--maybe I'm wrong about this--has a larger stock of in-house folk to transform Google's products directly. That's not 100% true. Obviously Google buys companies all the time. But there is a range of choices in this space that different companies can make. Guest: I think that's right. I don't know, you know, either company intimately. But the thing that I've been impressed with by Google is, Google also has this willingness to drop projects and cut projects and give up on things. Often in quite a public way. And I think one of the things that people worry about in big companies, it's what you were saying before about bureaucracy--that you start down a certain road and you ignore your sunk costs and you just keep chucking more money into that rabbit hole of runover[?]. And Google does seem to have an ability to at various times to say, 'Well, that's not working and we're just shutting that down.' And I admire that ability quite a bit. I think it's almost a venture-capital-like ability to say, 'Look, that idea is not working and we're just not funding it any more.' I think a lot of companies, for good reason, don't trust their internal bureaucracy to make that choice. Russ: It would be really interesting to find out how they make those decisions. They don't necessarily want to tell us. Guest: We'll know when the biographies get--in a decade or two, right? Russ: I hope. I hope.

18:18 Russ: Let's turn to the other side of the equation. So, we've been talking about government and stimulating growth and some of the tradeoffs there that are inevitable. But in many ways the more interesting part of the topsy-turvy observation that we started with, that you started with, is this idea that we should turn toward the private sector, to capitalism, for fairness and justice. So, what do you think, in that quote you read--what kind of things are we talking about there? Guest: Well, I guess when I look out there for concerns, for example, about health care or about fair wages or benefits for people, there are just a wide variety of things that--you think about companies where we are always sort of telling them to do these things. You know, we are telling them to, you know, provide job training. We tell the private sector, with the housing permits, to build a certain amount of affordable housing. And to build parking spaces, and to clean up the environment. And it's not that the instinct behind those things is necessarily completely wrong. As I was saying at the beginning: I think that there is a role for government regulation of different kinds. But I guess I am often put in mind of the stories about golden geese and eggs and what happens if you don't pay attention to your golden geese. There is evidence out there, the last 10 or 15 years that the rate of startups in the U.S. economy has been steadily diminishing--not just since the Recession, but since the late 1990s. And that a smaller share of the workforce now works for smaller companies than used to, 10, 15, 20 years ago. I think that--I sometimes think to myself: If someone came along like the modern Henry Ford and had an idea for an enormous factory which would provide an enormous number of jobs to the working middle class, where could that modern Henry Ford build that factory? Would they even be able to build it? At least in any urban area in the United States? Or would they be swamped for 5 or 10 or 15 years in permits and regulations and zoning and traffic and on and on and on? And I think that we are in danger of looking at the private sector as that golden goose, that we can just tell it to do things. And what we really want companies to do, we really want them to engage in that capitalistic knife fight. We really want them to focus their energy on: how do you make things, and things better? We really want them to compete with each. We don't want them to compete on the basis of who can survive the ordeal of getting a zoning permit. And so--I think we are in some danger of making it much harder for both small companies to get started and also for the companies that we tend to glamorize--you know, the old big auto companies, the companies that had huge numbers of middle class jobs--we've made it very difficult for a company like that to keep functioning, if one did come along and was trying to grow. Russ: Yeah, it's an interesting set of points. I don't think we fully understand why the startups are declining. I think most would assume they are rising, growing dramatically--we have so much press coverage of the best ones and the most exciting ones. Guest: We see the winners. Russ: We see the winners and we assume that--we've interviewed many of the folks in that world here on EconTalk. It's exciting; we think of our country as pretty entrepreneurial in America, and it is relative to the rest of the world. But it's interesting: the data, at least--could be a data problem, and it may be a measurement problem: it's challenging to think how you measure it. But I don't think it's necessarily harder. Obviously there's a lot more regulation than there was 50 and 100 and even 25 years ago. But it's not clear to me that that stops firms from getting started. I think it's pretty easy to start a business in the United States. I think the incentive to grow it is what's challenging. And you alluded to that. I think the--first of all, a lot of the regulations don't kick in till you have a certain number of employees. So that does discourage firms from growing up to a certain point and then they have an incentive to stop. But there are plenty of firms that do grow bigger. It's just gotten sufficiently more expensive to do that and that's discouraged the size--or is it other economic factors that we've also implicitly been talking about in our discussion a few minutes ago, right? Where it just doesn't make sense to be the Ford Motor Company of 1920 any more. It doesn't make sense in today's world where transaction costs are relatively low compared to, say, 40 or 50 years ago, through the internet--that firms are much more able to be smaller, more nimble, and vertical integration just doesn't make sense the way it used to. So, it's not clear which of those effects is really driving things. Guest: I don't think we are going back to the days of Ford's old River Rouge plan, which was, what, a mile long, where you sent in iron ore at one end and cars came out the other end. I think the old [?] hugely integrated factory is somewhat behind us. But as I say--it's perhaps more of an impression than a provable fact--but when I look around at the struggles that companies have when they wish to expand and how they wish to grow, it does seem to me like a real struggle. I occasionally say something like--it's just one example; it's not a company but a project: we started and won and fought WWII in roughly a third of the time it's taking to rebuild the site at the World Trade Center. That's a big difference. And it's a big difference in social flexibility and it's a difference in ability to deploy resources in certain ways. And you could say [?] those are extreme examples--they certainly are, the pressure of war and the aftermath of catastrophic terrorism. But there's some sort of underlying message there that is true. Russ: Yeah. Interesting point. I think sometimes about--I don't know if this is the flip side of that point or a related point, but, when I was younger the argument was that government has to do certain things of certain size because the private sector just doesn't have the scope to do it. It's pretty amazing now what the private sector is capable of doing and the amounts of money that are available in capital markets now to access if they have a first-rate idea. But I'm thinking for example about the Hudson Yards Project--I don't know if listeners--I don't think we've talked about it much on this program. But Hudson Yards is the covering over of an enormous stretch of many, many square blocks in New York City of a rail yard--covering that over and building skyscrapers and apartment buildings and shopping and other infrastructure things on top of a rail yard. It's an unimaginably large engineering project. It's going to take a long time. It will probably take longer than it took to fight WWII. But it's an incredible mobilization of resources that's happening there. So there are still--and it is in the same areas, the aftermath of 9-11. It is in New York City. Having said that, it is an enormously bureaucratic project almost by definition in terms of the cooperation and permission you have to get from government--city, state, and federal government--for a project of that size. So I'm sure that is a large part of why it takes a long time.

26:39 Russ: I want to move away from that point, if that's okay, and get at a different aspect of what your observation is saying. Which is that, when I look at, say, Walmart, which is a lightening rod for many people, and people don't like the wages at Walmart and they want Walmart to pay more--and it might not just be Walmart; it could be a certain type of skill set that workers have--that's what I see as a fairness issue that comes down. It's not just the mandating of benefits per se. It's what you talked about at the beginning: it has to do with the fact that 'I just don't like these labor market outcomes. I don't like that,' say some observers--they don't like that Walmart pays a certain wage, that an Uber driver only makes x dollars. I see that as sort of the issue that people are increasingly wanting to fix via capitalism rather than via government. Do you agree with that? Guest: Well, I think there's some truth to that. I guess I have two reactions to that. One is that you are reminding me a little bit of a conversation I had with an old friend of mine a few years back, a non-economist. We were talking about the minimum wage and I was trying to explain sort of an economic viewpoint of the minimum wage--in a nonpartisan kind of way. So what I was sort of saying was, 'Look, minimum wage, the extra money for that minimum wage, it has to come from someplace. And maybe it comes from hiring fewer workers or maybe it comes from more productivity or maybe it comes from cutting certain job perks or it comes from higher prices to consumers or it comes from lower wages--but it comes from some place. And so, without specifying the place, you have to understand where it comes from. And you have to think about that tradeoff.' And my friend looked at me for a long slow moment and said, 'You know, I really don't like to think of the world that way.' Russ: Yeeaah. Guest: And I thought to myself, 'That's just a perfect answer.' Because it was an honest answer and it was an accurate answer. But that sense of:' I just don't like to think of the world that way' seems to me the sort of thing you are talking about. And I guess--we're both trained as economists and so we're both almost forced by our way of thinking to think about the world in that kind of a way. And once you start thinking in that way, then it just pushes you--there's a lot of people out there--there's this movie, I don't know, maybe 20 years ago now, called Dave. I don't know if you remember. It was back in the 1990s. It had Kevin Kline, who I really like. Russ: Yup. Guest: And at the tail end of the movie--so the movie is kind of doofus ordinary guy ends up as President; comedy results. And then at the very end of the movie he has his big breakthrough, leadership breakthrough; and his leadership breakthrough was he would just pass a law and guarantee everyone a job so there would no longer be any unemployment. Russ: Genius. Guest: And I remember thinking to myself: Yeah, you know, you don't think this has ever occurred to anybody before? It didn't occur to anybody in Sweden or Japan or Germany? No other countries figured out: Oh, yeah, if we just passed that law--you just sort of think--I think a lot of people think that way: Why don't we just get rid of unemployment and give everybody a job? And of course if you think about the tradeoffs, you think to yourself: Do you have to take the job they offer you? Do you have to take the pay they offer you? Can they make you move? How do private sector employers react to these jobs? What would the cost be of it? Can you fire people? It's on and on and on. But as my friend said: 'I just don't like to think about it that way.' So I think that's really an important thing to think about. It illustrates sort of a deeper problem or point that comes up with the profit sector and the government sector, which is this question of budget constraints. I guess I became familiar with this through the work of Janos Kornai, the Hungarian economist who wrote a lot about what he called 'soft budget constraints'--meaning when government ran enterprises in Hungary back in the old days, if a company was, you know, doing poorly, the company didn't go broke; it didn't lay off workers; it didn't cut pay. It didn't even reduce output. It had a soft budget constraint. So, basically, it asked the government for more money. In a way, the company in that world became sort of like college students--their notion of a budget constraint was asking someone else for money. And it's true that money runs out at some point; but it can take a long time. And you can get really focused on asking for more money instead of altering your behavior in one way or another. Companies--for-profit companies--for better or worse, they face--they have to make their costs balance out. And Walmart doesn't have a soft budget constraint. Walmart can't just lay out money and not see it show up somewhere else in the company's financial statements. And we can have a reasonable argument over what rules make sense and what rules don't make sense and who would actually bear the cost, and would there be this reason, would there be that reason. I'm open to that argument. But I'm not open to the argument that you can just sort of snap your fingers and make the money appear. It comes up in a bunch of ways. It comes up in wages; it comes up in, say, when people talk about the corporate income tax: 'We just make the corporations pay.' The money has to come from someplace. Russ: One of the most important lessons of economics is that who sends in the check for a tax is not necessarily the people who pay for it.

33:06 Russ: But I want to come back to your point about: 'I don't like to think about the world that way.' Because I think that's a very deep insight; and I think as economists there is a tendency to look down on that attitude. And I wanted to try to be empathetic to it rather than sneer at it. I sneered at it when I was younger. I was like, 'Come on. That's ridiculous.' But I think it's a very human, deep part of us. My version of that story--I have more than one, unfortunately; I only tell one; I don't know if I've shared this with listeners or not, but it's very related to your point. But I was at a point, and my wife foolishly mentioned that she shopped at Walmart for something. She had bought something at Walmart. And this was greeted with horror by some of the people at the table. And one of them said, 'You shop at Walmart?' Because obviously that would be unjust--it would be wrong to shop at Walmart. And then I, mischievously, with a straight face, though, not openly, but I have to confess I had some mischief--I said something like, 'Well, we always try to shop at Walmart because we want to increase the demand for workers with lower skills.' I believe that. It's not--I don't always try to shop at Walmart. And we actually don't shop often at Walmart: it's far away here, because here in Montgomery County outside of Washington, D.C., the city government has made it hard to try to start Walmarts. That's related to your other point: it's very hard to permit a large store in Montgomery County. It's expensive. Guest: And a retail operation. Think if it was a manufacturing operation emitting something. Russ: Yeah. It's expensive in time as much as money; and it forces businesses to coddle and pander to lawmakers here, city council members. But the point is, I made that remark; and I believe it. I believe it's true that shopping at Walmart is good for workers with low skills. But I [?] that's an unusual viewpoint. And the person who didn't like shopping at Walmart responded to it in a very educational way for me. She could have said, 'Wow, how would that work?' Because that's not what she thinks; and that would have been interesting. She cares about workers, and I think that would be of use to her worldview. But instead she said, 'I don't have to listen to this.' And she got up from the table. Which is a different response. And that's your friend's response. It's like, 'I don't even want to go there. I don't want to think that that's possible.' For a whole bunch of reasons. Some of them I don't like, some of the reasons. But some of them, I have to confess--there's an argument there, which is: You and I, and people trained in economics see the world as expensive--that there's costs; that there are, as you say, the money has to come from somewhere. That's kind of takes the fun out of it. It's realistic--we think; and I think it is. But it's--I understand how unpleasant it is to be confronted. It's like someone holding--it's like walking around thinking you are a really attractive person and then every once in a while someone says, 'Oh, by the way,' and they hold up a mirror, and you go, 'No, no, no. I don't like to think of the world that way.' And there's something beautiful--to give the argument its due, there's something beautiful about thinking the world's more beautiful than it actually is. But I would argue it's not so helpful in designing public policy. Guest: Yeah. I think there's a couple of things behind that feeling. I agree it's worth--when a feeling is widely held, it's worth being as sympathetic toward it as one can, because you need to figure out where it's coming from and what's going on. Russ: Yeah. Guest: It's interesting to me when, for example, when Steve Jobs died, there was sort of this outpouring of, I don't know, emotional support for the man and his life's work. And what's interesting about that was, Steve Jobs was, you know, as ruthless a capitalist as there's been. Russ: Yeah. Guest: And at that moment, though, it was okay that he was a ruthless capitalist-- Russ: And really rich-- Guest: and never gave any money to charity. It was sort of celebrated for a little while. And I just thought: that's interesting; here's a moment--when Sam Walton died, I don't know if there's the same feeling of, 'Wow, he revolutionized something.' And a certain kind of praise. And I think some of that is, for lack of a better word-- you're referring to this as, well, it's kind of a class thing. One of my undergraduate economics teachers, I remember when people talked about buying cheap goods at places like Walmart, he used to say, 'Everyone has a right to buy inferior merchandise.' And I remember having to go home and think about that for quite a while. But, you know, his point was: not every place needs to be the sort of place I would shop or the sort of place I would go or the sort of thing I would do. And that's at either end--upscale, downscale, or in between scale. So the heterogeneity of what's offered in markets, the extraordinary level of variety, is something which is, to me, it's amazing, it's remarkable, it's highly attractive. I think for some folks that level of variety makes them crazy. They sort of look at certain things and they say, 'Why should that be that way? Why can't everything be this other way?' Or Walmart--it's kind of, 'Why can't everything be like Costco?' is often the comparison that you hear. And you think, 'Well, because they are really different operations.' Russ: Yeah. And I love Costco. I love Costco, I have to confess. But I don't delude myself into thinking that everyone who works there is gloriously happy. As opposed to the oppressed slaves at Walmart. I think they are both very attractive choices for certainly people who want to work there. And I think they are both pleasant places to shop. And I don't judge anyone who shops there.

39:22 Russ: But the version of this that I think--to get back to your more serious economic point, which I think is very relevant--is that, if you are listening out there and you don't like the fact that some people at certain companies don't make much money, or you think they should make more, whether it's your local coffee place or a national chain of some kind, your question of 'Where does the money come from?'--I always think of it, I ask it a different way. It's like: 'I understand their desire to make their lives better, the people that you are worried about. Why would you make the people who are currently employing them pay for that? Because that encourages them not to do as much of it.' That's the problem that I have; and I think that's an unpleasant--for what I think is a reality. Guest: I agree with that. I think more broadly what I struggle with, and this goes back to the original point, is about the separation between production and distribution is something that economists have been struggling with one way or another for a long time. When you look at a production situation and you say, 'I dislike the distribution of outcome or income that results,' it's something where, again, I think this goes back at least to John Stuart Mill's 1848 book, where there's one book on production and another book on distribution. And he always sort of said that difference was the big change in the book. He liked to argue that production has sort of a physical character, like a physical wall--you are putting things together, you are making a good or service. And distribution is the outcome of human institutions and human decisions, to at least some extent. And so, I'm actually pretty open to various things. There's a proposal[?] a few years back by Ed Phelps--Ned Phelps--about dramatically increasing the earned income tax credit in a way that people who work at places like Walmart, instead of being paid $10 bucks an hour, they'd get $10 bucks an hour from Walmart and they might get another $10 bucks an hour from the Earned Income Tax Credit. And he proposed spending an extra $100 billion dollars a year for something like that, on that kind of a wage subsidy for low-income workers. But it's to your point. If you really think that's a valuable thing to do, why would you load that on the company? Why wouldn't you say, if it's an important social thing to do, let's have the redistribution we want to have but let's do it through the government? Which after all, it's core competency is collecting money and writing checks. And it's capable of doing that in a way which lets the production side operate the way it wants to operate. And do what its core competency is, of transforming goods and services. So I just think that--you can't 1000% separate production and distribution--but I just think that whenever you have a distribution problem, it's useful to think about, 'Well, do I care about that enough to, I don't know, pay higher taxes for it?' And if you don't, maybe you don't care about it enough to enact it. Telling somebody else they need to do it is a problem.

42:35 Russ: That gets us to the political economy of this; and going back to the original observation we started with about this topsy-turvy of expecting government to do one thing and expecting the private sector to do the other. And I think in this case, government--I'm going to get away from that word for a second--politicians, actual human beings with decision-making faculties--it's clear why they like blaming the producers for distributive problems, because then they don't have to use scarce tax money for that purpose. So, I understand the natural incentive they have. I guess the question is: What do they spend the rest of that money on? What are they saving it for? Right? One argument would be: they don't get enough credit, political credit. The Earned Income Tax Credit, for example, that you mention--it's going to be hard for a politician--after that's there for a while, maybe it's hard for them to get the credit for it. Whereas the stuff that they save the money for--we'd have to think about what that would be--maybe that has a bigger political payoff. But that's clearly the case. Because that's what they do. I think they are pretty good at what they do--staying in office. And responding to those incentives. Guest: No, but I think that's right. And I guess I--you know, it's always true: when you look at what does the Federal government do, it's sort of fair to say that the Federal government is, it's a health care operation; it's a retirement operation with Social Security; it's defense; it's interest on the national debt. And everything else is not very big. It's just not. And so when, I sort of say, casually, well, we should do more on Research & Development, or I say casually, 'Well, so maybe we need to really think, substantially about more of cash redistribution, if that's our goal'--those are definitely things that are to some extent outside of what the government has seen as its basic, core responsibilities. I think the political economy of it is, as you say, it's obvious. It's always nice to make a pronouncement that the problem should be fixed by someone else. And it's even better if you can pass a rule or a law that says the problem should be fixed by someone else. And you don't have to--doesn't have to be on the budget. That's the attraction, I think, of, you know, protectionist trade legislation; it's the attraction of requiring, you know, car fuel economy. It's the attraction of all kinds of things. And you just sort of tell people what they ought to do. And, when you do that you are then in this world where you are interfering in the production side of things for distribution-type reasons. And without really taking costs and benefits into account. And it's--in some cases it works out okay. But it's a constant danger to keep an eye on. Russ: Yeah. And the other part of it, of course, is it's fairly politically dangerous to take money away from people, compared to, say, giving money to people, as a way to earn support. So if you wanted to institute an anti-poverty program at the scope that the Earned Income Tax Credit might lead to, you'd say, 'Well, here's how I'm going to fix that. I'm going to make Social Security means-tested'--which I personally believe it should be. I think it's absurd that we give rich people the benefits that--and then there's redistribution built into Social Security--put that to the side--I don't think it's strange that rich people have lots of savings and get paid substantial amounts by the government. And people will say, 'But they earned it. They put their money in'--well, that's kind of a sham and a hoax. [?] Guest: [?] Russ: Yeah. [?] I think most of us who are blessed and fortunate enough to be financially successful would be very happy to give up some of our Social Security benefits that we have been "promised". They've already gone out the door, our money--it went out to pay for all kinds of things, not Social Security, but that was put in a lockbox--sorry. And so, I think that would be a good thing. But politically, that's not a good thing. I think politicians would be very vulnerable to the charge that they don't care about old people, if they cut Social Security benefits in any way, even if it was just for the rich. Now that may change. I think when budgets and demographics are such that will be the first thing that gets cut. But I think one of the reasons that the status quo is so powerful is for that reason. And it's very hard to innovate and use money for new things at the government level. Guest: Yeah. I think that--to me, the other part that I struggle with is that--there's direct redistribution of this sort that you and I talking about: what you pay for people who are on Social Security or what sort of a wage subsidy you give for low-income workers or low-wage workers. The other approach the government can take, presumably, is to take more seriously the notion of its having a role in training; having a role in mobility and helping people get from one place where maybe there aren't so many jobs to another place where there might be more jobs. And to some extent--I know I keep coming back to this--but lots of people, almost all the new job growth in the economy, happens because of these small, startup businesses that get started and grow. So I think that thinking more seriously about--you know, skills that folks need and how businesses can be not loaded with too much before they are ready to handle it; how people can geographically get from the neighborhood or the city or even the state over to some other place where there are more opportunities. I think that one of the difficulties that sort of pushes this worry about inequality and wages and other things is this sense--and I think it's a legitimate and real sense--that some people, a large number of people, are just trapped. They don't have the skills; they don't have alternatives for jobs; they don't--you know, they don't have the ability to move or relocate. And if you get a lot of people after a long, slow, sluggish recession who feel that way, there's a real feeling that--it's a legitimate feeling--that part of the American bargain, the bargain of 'There will be disruption but there will also be opportunity,' sort of feel like we're getting all the disruption and none of the opportunity. So I guess the question is: Can you, in a slow way, and it's not a quick fix, rebuild some of the opportunity feeling of that [?] Russ: Yeah. Well, that's a big issue. And I think the issue there is--a lot of it has to do with our education system, it's inflexibility; and it's one of the areas where I think government is too involved in the production side of things. But that's a long conversation for another time. Guest: Sounds good.