The Economist’s View of the World
2022-07-11 · Guest: Steven E. Rhoads (Professor Emeritus of Politics, UVA) · 52:28
Economic Thinking and Public Policy Analysis
This episode features Steven E. Rhoads, Professor Emeritus of Politics at the University of Virginia, discussing the fundamental principles of economic thinking. Host Bob Zadek and Professor Rhoads explore how concepts like opportunity cost, marginalism, and economic incentives provide a necessary framework for evaluating public policy, using examples ranging from the COVID-19 pandemic response to the efficiency of Congressional cafeterias.
Topics: Economics, Public Policy, COVID-19, Opportunity Cost, Marginalism, Incentives, Markets, Central Planning, Wealth Redistribution, Competition, Regulation
Speakers:
- Bob Zadek: Host
- Steven E. Rhoads: Professor Emeritus of Politics, University of Virginia
Introduction to Economic Thinking [00:00]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running—yes, longest-running—libertarian show in all of radio. Thank you so much for sparing an hour of your valuable time to hear what myself and my guests have to offer for you.
This morning, I’m delighted to welcome to the show Steven E. Rhoads. Steven has taught public policy at the University of Virginia for more than 30 years. He has published extensively, including in such left-wing publications as the New York Times and some more centrist, the Public Interest, and other publications as well. He has written—and this will be the subject of this morning’s show—The Economist’s View of the World, and also he has written Incomparable Worth: Pay Equity Meets the Market. And I’ll add, Steven, as if pay equity could ever meet the market, but we’ll find out a little bit more about that.
So with that, this morning we are going to help our friends out there when they listen to the news, when they make decisions on how they feel about the issues of the day. We’re going to help them think like an economist. Now, thinking like an economist doesn’t mean you will therefore reach the right public policy conclusion, but it does mean you will add a point of view to your analysis that will help you decide.
And the reason I add that qualification is, there was a lesson—and this will be relevant, I think, to the conversation in a few seconds—the relevance is, during the recently ended—yes, I say ended—pandemic crisis that we have all suffered through for the past couple of years, we have watched a battle go on, something like the battles that Aristotle first discussed and Thomas Jefferson felt and wrote about. Historically, there was this battle between the heart and the mind. And Jefferson struggled when he was having an affair in Paris with a woman he had met there; Aristotle had the same struggles. It is sometimes when one has to make a decision, one has to decide: pick the rational answer or the emotional answer. There’s a battle that goes on, and sometimes one organ wins and sometimes the other wins.
Well, in the COVID crisis, there was the 21st-century version, in my opinion, of the battle between—in deciding what to do about society during the pandemic—should those policy leaders have made a decision that was best for the economic health of the country, for the physical health of the country, or somewhere in between? And what we saw historically was, we saw that the economist’s input was ignored. It was 100 to zero against the economist, and we are now witnessing the aftermath. And the point is, and the reason this conversation is so relevant is: had the policymakers taken, to borrow from Steve’s title, an economist’s view of the world, many of the decisions they would have made would have been different, and I dare say would have been better. In other words, there’s a seat at the table for an economist’s point of view. That’s not to say that always leads to the correct answer, but it has to have a seat at the table. So the next time there is a table for which we need a seat at, at least all of us now can be the economist. So Steven, with that introduction, thank you so much for joining us for our conversation today.
Steven E. Rhoads: Well, it’s a pleasure, a real pleasure, Bob.
COVID-19 and Economic Trade-offs [04:51]
Bob Zadek: Now Steven, I know this wasn’t in your book—your book was not prescient enough, at least in the first edition. You have recently brought the book current; it was very popular, surprisingly popular, perhaps even for you when you wrote it. It was written for one audience, and another audience, a wider audience, discovered it and purchased it. And you have recently published an updated edition. But in neither edition could you have predicted the pandemic and its aftermath, of course not. But you sat and watched the crisis unfold wearing your economist creds. So would you like to offer, as we introduce the topic, some commentary on how the management of—we’ll just restrict it to our country for the minute, the lessons are probably worldwide—but had an economist’s view of the world been applied, are there some really dramatic lessons that could have been learned and major steps that would have been done differently had an economist’s view of the world been adopted instead of just an epidemiologist’s view of the world?
Steven E. Rhoads: Yeah, I think it would have been different. For one thing, economists are—you know, they’re not all for health or not all for any one thing, if it’s not war. I mean, economics is all about: you have to give something up when you go all-in on health. And I think in retrospect, I don’t think many people think—I mean, look at the disaster it was for our kids staying home, especially low-income kids. All the Democrats and liberals were in favor of health, health, health, but they ended up—we’ll have to see long-term, I hope it’s not as bad as it seems to be—but the kids who are upper-income did reasonably well not in school, although they were worse off. Poor kids did terribly.
So I think in retrospect, you’d have to say liberals would be disappointed in the results because what is it? They’ve lost about a year of study, and it’s very hard to bring them up to speed, even though their speed was worse. So economists—one of the beauties of economists is, if I could say a word about marginalism. You know, they don’t say, “Which is more important, health or economics?” They say, “Well, they’re both important.” And economics is important because there’s more than one thing we want. We don’t just want health. We don’t want just to stay alive. We want education, we want recreation.
When you ask the public, it’s hard for them to see this. They will say, if you ask them, “What’s more important: safety, or education, or recreation, or transportation? How would you put our priorities here between those?” And they’ll come back and they’ll say, “Oh, safety’s the most important.” And then if you’re listening to that and you take it seriously, you say, “Well, I’m not sure we should subsidize Little League then, because a lot of people get hit in the head. People get hit in the chest and their hearts stop. This is a dangerous sport. If safety’s the most important, why are we subsidizing Little League? Why are we giving them free access to our public parks?” And I think any ordinary person would say, “That’s ridiculous. It doesn’t happen very often. We have more than one thing we want. We don’t want just health. We also want recreation. We don’t want to be locked up in our rooms and our houses for months on time.” So how just how bad is this? My son is actually a statistician, and he’s really upset about the whole thing. He says, “Look, how much worse is it than the flu? Not a whole lot. And we don’t do all this for the flu.” Everything has to stop. So I think an economist would definitely say we have other goals besides health, and we should pay attention to them and think about whether it’s psychologically and educationally good to lock all these little kids up when they’re not learning anything.
Opportunity Cost and Marginalism [09:09]
Bob Zadek: Your book does a wonderful job explaining some core economic principles. You organize your book to some degree around these principles, and you used one of them just a second ago: marginalism. An important economic concept. But also, unbeknownst to many of our listeners perhaps, marginalism has an economic context, but just as you used it in your explanation, people make marginalism decisions all the time in running your life. Is it going to be A or B? How much of A versus how much of B? So if you would, let’s be an economist for me for a moment—for you, it’s how you have spent your career—and we’re going to discuss three concepts of importance in your book: cost, marginalism, and economic incentives. And if our audience understands these concepts in an economic sphere, they will see how naturally it applies to everyday life. So in the context of your book, help us understand conceptually opportunity cost, marginalism, and economic incentives, just so the audience can follow our discussion as we use those terms.
Steven E. Rhoads: That’s a good idea, Bob. I think opportunity cost seems so natural. Who—I mean, look, when you go to the grocery store and you thought you were going to get a nice steak for some celebration and, boy, steak was high, hamburger was normal. You say, “Well, I just don’t think it’s worth it. I’m going to buy the hamburger today. We’ll have to put the steak off until steak price comes down.” You do that all the time.
But if you’re talking about public programs, you know, you’re just one person out of hundreds of millions. So taxes don’t mean much to you. If you say, “Should we pay more—should we spend more on the environment? Should we spend more on recreation? Should we spend—” the public, if you just ask them like that, wants to spend more money everywhere. But then they say, “Well, we’ve got to pay attention to that deficit, too.” It’s really funny almost. If you ask them straight out, “Should we have every person who’s got a disability or a problem medically, should they be covered by insurance?” And it’s something like 95% say, “Yeah, yeah, sure, insurance companies should cover that.” They say, “Well, if your taxes go up, how about it?” “Well, then it’s 55%.” So it goes from 95% to 55%. Well, of course, somebody’s going to have to pay for it. And it’s easy for the public to forget in a public context the opportunity cost.
They—there’s a tendency to say all these things are good in principle, but what we have to do is decide on the margin: are they good? Let me give you one example. There are these rumble strips that they put on roads these days. It seems like a wonderful idea. If you’re drifting off the side, you’re a little bit sleepy, you’re not paying attention, boom-boom-boom, your tires just make a whole lot of noise and you wake up. I’ll bet that saves a lot of lives. Well, if the transportation department comes in and says, “We want to spend five times as much on this, it’s saving a lot of lives,” an economist would say, “We have to look at the margin to see how much we’d save. We put those rumble strips in where the traffic was the most. If we put them in every country road, it’ll cost an enormous amount of money and there are better ways to save lives.” So we have to look at the margin. Additional expenditures won’t get as much benefit because we put it first, hopefully, where the problems were the greatest.
So that kind of is both opportunity cost and marginalism. Opportunity cost in the sense we have to realize there are other ways to save lives besides rumble strips. And economists always think of this. The economist at the dedication for a new recreation center—he’s the only one who’s a little bit moody. Everybody else: “Oh, it’s going to be great for the seniors, they’ll be in here, they’ll be able to play cards, there’ll be lectures and so on, it’ll be wonderful.” The economist is saying, “Yeah, but if we put it in education for the poor, we could have raised scores by a half a grade. And suppose we put it into basketball courts or something else—there’s some other—or suppose we let the public decide for themselves how they want the recreation.” You know, all these things—that’s a sense of opportunity cost. So the economist is always the sourpuss. He’s saying, “Yeah, yeah, it’s good, but it’s not good because there are other things that are maybe better that we’re not doing.” So that gives you a taste of opportunity cost and marginalism.
Economic Incentives and Markets [14:01]
Steven E. Rhoads: Economic incentives is simply the understanding that just because the roads are all filled up doesn’t mean we need more roads. Maybe it means we need a better pricing system of the roads we have. You know, suppose—and we’re getting a lot better at this now, not nearly good enough, not nearly good as places like—I forget, it wasn’t Hong Kong, it’s some other place there, they’ve done it for years—but suppose the driver had to pay a cost when he’s thinking, “Should I go in at rush hour or should I go in at 10:00? It doesn’t matter to me, it’d be good to get in early.” And he’s thinking, “Well, it’ll take a little longer if I go in at rush hour, but on the other hand, I’ll get in and I’ll get more done.” That’s what he’s thinking. He’s thinking of the private costs of going at rush hour. But what he isn’t thinking about is everybody else on the road at rush hour is going to get there slower because he made that decision. How can we get him to realize that other people are involved in his decision? We can do it if we charge him more for driving at rush hour than if he drives at 10:00 AM. And it’s easier to do that now. Most big cities have systems where they can sense the license plate as it goes by at a rush hour and they send you a bill. My wife complains about the bill all the time, and I tell her, “Well, don’t go at that time, it won’t be so big.” So that’s the idea of economic incentives. Do we need more tennis courts? It’s so busy after work. Well, I’ll bet some of the people aren’t working. Can’t we encourage them to play at 3:00? How would we do that? Well, if we charged a little something for our public courts, we could do it. So economists are always thinking of ways you can bring economic incentives in to get a better public outcome.
Bob Zadek: And what’s interesting about economic incentives is the key—when you explained economic incentives, the key, the word you didn’t use but underlies it all, is markets. In other words, let’s take traffic, one of the examples you cited. The roads are too crowded during rush hour. Well, there’s two ways that I can think of to make the roads less crowded. Number one is assign people a driving time. You are only permitted on the road during this time. In other words: force, coercion, compulsion, and denial of liberty. That will work, but at what cost? The cost of liberty. The other way is to say you can drive anytime you want, but if you want a service, a commodity—that is, driving at the speed limit—you have to pay for that luxury and pay the market price. What is the market price? The price that will keep the roads moving smoothly. In effect, it becomes an auction, and those who need it the most will pay the most for it, and therefore no—everybody is free, total freedom, no coercion, and everybody gets to drive at the speed limit unless they can’t afford it. It becomes something else that if it’s really valuable, you will pay the price, otherwise not. So it’s nothing other than the very obvious answer of: to the extent that people pay for a service what it is worth in the market, there is an allocation of an otherwise scarce resource, but it’s done without coercion. So that’s just another way that I have heard what you have said in discussing economic incentives. Now—sorry, Steven, you were going to say something.
Steven E. Rhoads: Well, I was just going to say something a little more about markets. I love markets. Most of my academic peers don’t. If they’re not in economics departments, they’re very skeptical of markets. They tend to say, “Oh, these economists, it’s like a love affair with markets. It’s like a religion with them.” And of course, it’s also associated with conservatives. So of course, my colleagues in other departments don’t like it for that reason. And therefore, one of the things I bring out in the book is that it’s not just conservative economists who like markets; all economists who are mainstream economists like markets. Joseph Stiglitz—if people follow the left side of the spectrum, he’s as about as far left as you can get. He agrees with a lot of things that Bernie Sanders agrees with. But he wrote an article in the Washington Post where he said, “I’m not a socialist, because I know, I know that every successful economy in the world uses markets and private property. So I call myself a progressive capitalist.” Or you talk about Paul Krugman. He writes a textbook and he talks about markets being marvelous in the way they allocate resources. Now, of course, that doesn’t mean these people aren’t—a lot of libertarians aren’t going to like the rest of their agenda; they’re going to interfere with markets more than most of us would want to. But the point is they love markets.
The reason economists love markets is they know more about economics. If I could get these people who say it’s just a religion to study economics, I think they’d know what I know: that markets are marvelous things. If I could give just one example. Suppose you had allocation done by some expert. First of all, if you ask a 12-year-old, “What’s the best way to set up an economy? To have it done by everybody lives wherever they want, they work wherever they want, they work as much as they want, or to have the smartest people in the country decide who should do what, where?” A 12-year-old, even if he’s brilliant, might say, “Oh, that sounds like you’d get more productivity that way.” But of course, you don’t. That’s central planning. The problem with central planning is there’s so many interconnections that it doesn’t work.
I want to talk about sawdust. You might say, “Sawdust? Why don’t you talk about steel and so on?” No, I want to talk about sawdust and markets. Because most people would say, “What do you need markets for sawdust for?” Well, because it’s a big market for it. A lot of people want sawdust. There was a big shortage of it when the building went down during a recession, and economists up in Vermont asked a milk farmer, “Boy, the price of milk is way up, how come?” And the guy said, “Oh, it’s because my sawdust is so much more expensive.” And the economist said, “Sawdust? What’s that have to do with milk?” He said, “Oh, my cows love sawdust, and they’re comfortable lying down on it. When they lie down on sawdust, they give me more milk.” So I looked into this, and of course, there’s lots of other ways you can use sawdust. It’s used in mulch, it’s part of a composition that’s used in dashboards for cars, it’s used in charcoal. So if you did this allocation, you’d say—suppose the milk price went way up, and then your people said, your constituents said, “That’s ridiculous, my kids need milk in school and they’re not getting it, it’s too expensive.” Well, the administrator, the guy who’s allocating, might say, “All right, we’ll find a way to give cheaper milk to you in school.” And what are the mulchers going to say about that? And what about low-income housing? You know, one of the ways mulch is used is in particleboard. It’s the cheapest kind of way to build a building. If you say, “I can’t—my mulch, I can’t do the particleboard, therefore I’m spending—my lumber’s going to be more expensive and all my prices of low-income housing are going to go up.” The administrator’s going to say, “Well, that’s a problem, I didn’t know—well, I didn’t know that.” You didn’t know a lot of things. You didn’t know about charcoal, you didn’t know—it’s—there’s all this interconnection. When you lower the price for one person, there’s only so much milk, there’s not as much sawdust. Somebody’s going to have to get less of it. And the beauty of a market is whoever’s willing to pay the most of it, all the producers are speaking for their consumers, and they know how much they need given the price.
Scarcity and Price [22:19]
Bob Zadek: Diamonds—forgetting about the fact that they are scarce, a word I don’t want to use, artificially, by the diamond miners withholding production—diamonds are considered to be somewhat rare, somewhat scarce. Therefore, they’re more expensive. Diamonds are not scarce. I don’t know of one person who wants a diamond and is willing to pay the price who can’t get it. Anybody on the planet who wants a diamond and is willing to pay what it costs can have a diamond. Therefore, the word “scarce” doesn’t exist. It’s impossible. What it means is it’s not available at the price somebody made up that they want to pay for it. So scarcity is a strange word. So in the issue—and you mentioned price. I did a whole show on price, so my audience can kind of follow your discussion. And that is, if what price is—price is the freedom way to decide who gets something, rather than having it be decided by fiat. You mentioned healthcare. Shouldn’t everybody have healthcare? The answer is: sure. That’s the easy question. The harder question that you suggested, but we didn’t go into it, is: okay, we agree, everybody should be healthy, should live to be 400 years old. We agree. But then who pays for that? Somebody has to pay. And that’s where an economist says, “Hey, it’s not a question of whether something is desirable, it’s a question of whether it is—the three magic words—worth the money to the person making the payment.” And it’s simply a question of: is something worth the money?
Steven E. Rhoads: Yeah, I think that’s true, but it’s tough for the ordinary folks to understand that because they say, “Look, why is water so cheap? Water we need it to live. Diamonds you don’t really need.” This puzzled Adam Smith until the marginalist revolution in the 19th century. A lot of bright economists figured it out. It’s again the idea that we’re looking at the margin. If you have a whole lot of water, you won’t pay much for more. But for diamonds, you don’t have a whole lot because it’s very expensive to get them. And so you’re absolutely right. The scarcity—in a way, economists said, “What do you mean we shouldn’t talk about scarcity? That’s all economists talk about in a way. We can’t have everything.” And you’re just saying it in a different way. You’re saying you can’t have everything if you don’t have the money to buy it.
Bob Zadek: Exactly. Anybody can have whatever they want if they’re willing to pay for it. Now, you mentioned—you used the phrase when referring to Paul Krugman and Joseph Stiglitz—you used the phrase, and you do also I believe in your book, “left-wing economists.” Now, that struck me as being a strange concept because “left-wing” is a political construct; economics is a scientific—a dismal science to be sure, but a scientific construct. It’s like a left-wing view of gravity. I mean, you can’t have it.
Steven E. Rhoads: Well, let me interrupt, Bob, because I don’t think I used “left-wing.” I think I used the word “left-of-center.” And what I—the main—if you’re not an economist, the reason I want people to get from the book—the most important thing I want to get in the book is more respect for markets. Because most people don’t understand them at all. And they’re marvelous things, as I mentioned Stiglitz—even Stiglitz and Krugman say is marvelous. So anyway, if you’ll rephrase it to “left-of-center,” we can go.
Bob Zadek: I will, happily, and I accept—I accept graciously the correction. So I think—I think somebody who is a left-of-center economist, that left-of-center economist, Paul Krugman if you will, acknowledges what the lesson of economics is, but is not happy with the result. So says, “Despite the truism of economic analysis, it yields a result I’m not happy with. That is, too many people don’t have enough by my standards. Therefore, I have to cook the books a little bit. I have to pay less than 100% attention to the economics because I have other goals, political goals, in mind.” So please explain what it means to be a left-of-center economist when we are talking about something which is kind of scientific, as in dismal science.
Steven E. Rhoads: Well, I think it means that markets are marvelous at giving people what they’re willing to pay for, given the dollars they start with. But a left-of-center economist is very concerned about the dollars some people start with. They think some people have too few and other people have too much. This is the distribution of income issue, which is so important these days. It’s one of the reasons I needed a new edition, because back in the—when I wrote the first edition, people kind of agreed among economists: a rising boat lifts all—I mean, a rising tide lifts all boats. I think that’s still true. Now people don’t realize that, but economic growth helps everybody. Therefore, when you talk about how much the 1% get versus everybody else, it’s a little misleading because the 1% invest most of their money. And the investment leads to new inventions which save money or give us new products. So it’s not really the case that the 1% get all the benefits. One economist who’s well-known says 98% of the benefits from innovation go to the public, 2% go to the innovator. It doesn’t seem so bad to me. So I understand the impulse of left-of-center economists, but I do think it’s important to remember what the founders said about property values. The guy who earns it, who puts together the company, hires everybody he needs, gets the materials and puts it out, he’s in a way the guy who made the product. He should get most of it, of the returns. And I think left-of-center economists tend to want to tax everything away from him that they can get away with and still he starts to work so much less that they don’t get anymore, they get less. Which seems unjust to me. But yeah, I think left-of-center economists just aren’t happy with the dollar votes the way they’re distributed by the market. And they would say, “I want to redistribute those.” Now that has unfortunate effects on economic growth, which we can get into. But that’s why they say, “I’m still an economist, I’d want to redistribute—” one big—they don’t want all these food stamps, they tend to not want all these particular programs; they want to give money to the poor. Don’t pay for a lot of administrators to administer this and that. They say, “Let’s get more resources to the poor, and then I love markets.” So that’s where they come from.
Wealth Redistribution and Private Efficiency [29:46]
Bob Zadek: Now, you mentioned in your updated edition, you spent a fair amount of time on wealth redistribution because it was—it’s much more a dominant part of government operations today than it was when you wrote your first edition of the book. And redistribution of wealth has much of the public’s support. Part of the reason I’m doing this show is to help that public at least make economic analysis, not just emotional analysis. But on a discussion of redistribution of wealth, what that concept is really doing, I think—and I invite your comment, Steve—the concept of redistribution of wealth is really a judgment about who can best—who can make the best spending decisions on how that money is used: the owner of the money or the government. That is to say, if we want economic growth, and if we start with a pot of money that is about to be taken away from the 1/10th of 1%, whatever the fraction is, is that owner of the money able to make the best economic decisions about how to further the common good, or is government? And that’s a decision about economic wealth. Who do you want to spend the money for the benefit of all of us: the political process or somebody who is driven by making more money, which means investing it wisely?
Steven E. Rhoads: Yeah, that’s a very good argument. Let me talk about that a little. Very important. Because—how shall I start on this? Well, one way to start would be, you know, people complain so much about our economy. I love Deirdre McCloskey’s work.
Bob Zadek: Deirdre McCloskey.
Steven E. Rhoads: Deirdre, sorry. My sister’s name is Deirdre and they’re spelled the same, so I—anyway, she says, you know, all the economists study, they say, “Oh, there’s imperfections, you know, there’s not perfect information, and the business knows more about the defects than the guy who buys it does of his product, and there aren’t enough competition in some markets.” And she said, “All right, let’s look at the big picture. In 1800 versus now, the average median person has 23 more—I mean, 23 times as much more real wealth as they did in 1800.” And as you want more competition, how much did they have back in 1820? They had a company store. How much competition did they have? Well, they didn’t have any at all because it was too expensive or not very—to go to the next town you had to get on a horse and go 15 miles, and therefore whatever the guy wanted to charge you, you pretty much had to buy. Now, that doesn’t—that’s not true anymore because we had various revolutions that came from rich people investing their money in products that turned out to be very helpful. And one of the things that was helpful is easier kinds of transportation; you could get to that next town a lot quicker. That made for more competition. Now, of course, you can sit at your computer and get all kinds of competition from all kinds of middle people—Walmart, Amazon—who are working around the clock.
Now, a lot depends on whether you—so I think—another way to look at this is ask people. Don’t ask them how much competition there is in this big business bad and so on. Ask them, “How much faith do you have in the following institutions?” And Georgetown had enough sense to do this. It was very recent, like six or eight years ago. They gave them 20 institutions: churches, charitable organizations, business, big business, small business, Congress, President, foundations, hospitals. How much confidence do you have in these organizations? You know what was on the top? Was the military. Number two was Amazon. Number three was Google. Number last was Congress. 18 out of 20 was the President. So in a way, it makes your point. If you ask the ordinary people like that, “Which one should control who spends the money?” They don’t have any confidence in Congress; it’s at the bottom of all these organizations. But they still vote because they like the sound of more help with their medical stuff, or more help with their food, or more help with their gas. But they don’t have any confidence that the Congress will do it right. And they think Jeff Bezos—I saw an argument that said if you ask businessmen, “If you had anybody in the world to put in charge of a business that you invested in, who would you choose?” They chose Jeff Bezos. Now, of course, now everybody complains about him, he makes too much money and so on, but he’s very good at what he does. And he also—there are limits to how much you can pick on him because Seattle tried to put a special tax on all his employees and he said, “All right, I’ll move.” Lo and behold, the city council said, “I’m not going to put it on anymore, we changed our mind.” So that’s one advantage of private property: there’s almost—you can only abuse them so much and they’ll fight back. Remember, Madison in the Federalist Papers says one of the most important things about division of power in government is protecting the rich, because otherwise the poor want to take it away. If they take everything away, you don’t have innovation. But go ahead, I talked too long about it.
Competition and Layoffs [36:00]
Bob Zadek: No, you didn’t, Steve. But you mentioned another word that you discuss in your book, but that the public sort of often gets wrong. The word you used that I’m going to comment on how the public uses it—the word was a very commonplace word: competition. We all know what that means. Often in public discussion, it is preceded by “cutthroat” competition, as if that’s somehow sinister. And I hope that those who read your book will, among the many conclusions of your book, understand that this competition preceded by the word “cutthroat”—what are they competing to do? Steve, as you and I know, some of the smartest people we would ever meet spend day and night in company offices trying to figure out one thing: how to get you and I exactly what we want at the price we want to pay for it. And they’re fighting for the privilege of satisfying our needs. That’s the cutthroat. That should give every listener goosebumps, that so many people have dedicated their lives to making us happy. So many people really care that we have exactly what we want at the price we are willing to pay for it. And you know what? If they don’t get it right, they lose and we, the fickle buying public, go somewhere else and forget their name immediately. So we have only survivors who have learned to be really good at getting us what we want at the right price. And that is what passes in this country for cutthroat, perish forbid, competition.
Steven E. Rhoads: Right. I think there’s a lot in that. I mean, now, for example, our President, who incidentally the Economist before he was elected said the history of Joe Biden does not suggest any interest in economics. And boy, have we seen that.
Bob Zadek: That’s charitable.
Steven E. Rhoads: And you could see that in when he was quizzing Supreme Court Justice, the guy who just retired, Breyer. Breyer’s really a smart—he knew economics. He actually wrote a book about economics, said the biggest problem we have is people want to get zero deaths in safety. You can’t do that without giving up too much else. He knows a lot about economics. And Joe Biden was the only one there who said, “Well, one thing I’m not wild about here, Mr. Breyer, is you want to make these judgments based on economics.” He doesn’t like economics, really. And of course, he had a chance to get Larry Summers to help him understand economics. Now, that’s a case of someone who’s left-of-center, but he loves markets and he wouldn’t do the stupid things if Biden had listened to him that Biden has done.
But in any case, yeah, cutthroat. Now, is it important that when there’s a shortage, as there’s a shortage of gasoline, therefore the price is up, that the person shouldn’t exploit the shortage? Economists, liberal economists like Alan Blinder at Princeton says, “Of course it’s okay for him to exploit the shortage. If there’s a big rain and you only have two umbrellas, you can raise the price of the umbrellas if it’s going to rain for three days. Why isn’t that fair? It is fair because there’s a shortage, there aren’t enough to go around at the previous price, so I’ll raise the price.” If you’re going to say no one should ever raise the price in a crisis, then are you going to say if there isn’t any crisis and they’re prepared for the crisis, they don’t get any benefit? Are you going to give them a subsidy because they were prepared for the crisis? You’ve got to let cutthroat competition—the public doesn’t like letting people off, laying people off. It doesn’t like it. Economists think it’s fine; it’s a sign that we’ve redistributed labor toward more productive things. If you don’t want anybody ever to be laid off, that’s like saying you don’t want electronics, you don’t want all the improvements we’ve gotten. You’ve got to get workers for those things somewhere, and you get them by people who no longer have jobs making steel.
Bob Zadek: You know, I’m glad you picked the concept of layoffs. It’s almost as if I gave you a 3x5 card and told you, “Use these words,” because this conversation—I’m thoroughly enjoying it because it’s almost as if we are using cue cards, which of course we are not. On the subject of layoffs, about how businesses are demonized collectively when they lay off workers. Remember the Michael Douglas movie, Wall Street, “Greed is good,” all that? That was all about layoffs. Now, let me discuss layoffs writ small and have you comment. Everybody who is or will ever listen to this show has made the same decision that a business person makes when he fires or lays off people or closes up a division. If anybody here has ever been patronizing one hairdresser and then found out a new hairdresser opened up, offered the same service at a lower price, and that individual in total innocence, pure as new-fallen snow, makes the rational decision: “I’m going to go to the less expensive hairdresser,” or whatever it is—plumber, you fill in the blank. What you have just done is made exactly the same economic decision with smaller impact, but you were as evil as the business person who laid off somebody. You fired as a vendor the expensive hairdresser for the simple reason that that hairdresser was charging more than the service was worth as proven by another hairdresser down the road. So that decision is as rational as a decision can be, and yet somehow we make it as part of our normal life free of any guilt, and laying off a business, laying off employees, is the identical decision just magnified.
Steven E. Rhoads: Absolutely right. And I think there was a debate between Bill Gates and Larry Summers. Bill Gates said, “We really should have a tax on robots, so many people are losing their jobs.” And Larry Summers said, “Why just robots? You know, anytime there’s a machine puts any person out of a job, does the same thing as a robot. Why pick on robots?” One of the reasons to see why we don’t want too much regulation of business and—a lot of people who want to be kind to employees don’t realize what the effects are. Here’s an example. In France, if you have a company of more than 50 people, you have various requirements on you. You have to give them a certain amount of paid vacation, I think it’s three or four weeks a year. You can’t fire them. You can’t fire—suppose things go down and you don’t—I don’t have as much business, I’ve got to fire them. No, you can’t fire them. So what do you do? You tend to pay people for overtime because you’re not sure this demand will be there before. So what you have in France is a lot of very well-paid employees who are paid time and a half for overtime and an awful lot of unemployment. When we have a problem economy, we have double-digit unemployment; they often have double-digit unemployment in France. And the people who are unemployed are unemployed for over a year. Now, we think we’re being kind to labor if we say you have to give this much maternal leave, you should have paternal leave, you should have mandatory vacations. But you’re really not being kind to the employees who are in the worst shape, the ones at the bottom. You know, if you’re a businessman and you want—you tend to hire really good people and you pay them overtime because you can’t hire new people. Some bright economist said, “I’m going to see in France how many businesses there are with 49 people and how many there are with 51.” And sure enough, he found almost nobody with 51, because you don’t want to go over 50 because then all these regulations come in.
Bob Zadek: The marginal cost of that last employee. It’s the marginal cost of that 51st employee. That employee cannot be hired; he’s legislated out of a job.
Steven E. Rhoads: Because the cost for every one of his 49 employees he had before goes up. They’ve all got to get this maternity leave and extra vacation too. So this is one of the reasons that France has not had the economic growth we have.
Public vs. Private Efficiency [52:24]
Bob Zadek: Now Steven, we have only a couple of minutes left. When you look at economic life in America today and you look at it through the economist’s view of the world, what do you—when you scream at your TV set, what makes you scream the loudest? We have about two minutes left, so you really can vent in two minutes. As an economist, what pains you the most when you see what’s going on in the economic life in our country?
Steven E. Rhoads: I think it’s all the talk about socialism. When Joseph Stiglitz, someone as left-wing as he is—there, I used “left-wing”—but he’s pretty far left, much further left than most economists, when he says, “I’m not a socialist, you need markets and private property to have any good economy anywhere in the world.” That the idea that so many youth say they’re socialist is completely out of the mainstream of economics, whether you call yourself left-of-center or right-of-center. And it’s a shame that so many young people seem to say that’s what I want. They don’t understand economics. They just don’t understand the beauty of markets.
Bob Zadek: Steve, in your book, to make a point about markets, you told a very interesting anecdote about, of all things, the Senate and the House cafeteria, which I presume serves free food, but maybe I’m wrong about that. Which would be a strange topic for markets, but tell us about your observation concerning the House and the Senate cafeteria. There’s a counterintuitive lesson that I’d like you to share with our listeners.
Steven E. Rhoads: Yeah, well, the House cafeteria works very well. The service, the food, people who make the food, serve the food, and so on, are done privately, so they hire a contractor. It’s very efficient. They’re so efficient that they take among their profits, they give over a million dollars back to the House every year and still make money as a private sector. Not only that, they attract Senate employees all the time because it’s good food at a low price. So now you compare that to the Senate. The Senate had everything done by the public: the cooks were in the public, the people who served were with the public. It was—and they lost money every year, so they had to get a subsidy from the general taxpayer of several million dollars every year. Dianne Feinstein was the head of a committee saying, “What can we do about this?” And she came back and said, “Let’s face it, the food is terrible. That’s why the people go over to the other place. It’s cheaper, too, but the food is terrible. And it’s very inefficient, and we’re going to have to contract out.” And she had to convince—it was a Democratic Senate at the time—she had to convince the Democrats to go with contractors. And they said, “Wait a minute, we oppose that, firing people’s jobs and hiring cheaper people when it’s in the private sector, we can’t do this.” And when she proposed it, there were people hooting and booing among the Democratic Senators. But she said, “Well, you want more of a subsidy, or we’re going to have to cut—raise the prices 20%? We’re going to have to do something.” “Well, we don’t want to raise the prices 20%.” So then they said, “All right, we’ll go contract out, just like the House did.” It was more efficient, better food, and they had to do it because right in front of their eyes it was clear that contracting out gave you better food at cheaper prices.
Bob Zadek: And to me, it’s interesting as you’re sharing that story, I jump to issues like school choice. How do I get there, Steve? Because the lesson is: government is as good as anybody else in providing money for stuff; they are terrible at providing the service itself. So in your story, the government in providing the service to the cafeteria, it was terrible. But anybody can provide the money, just give the money to the private sector and let them spend it, and they will make the right decisions. And why do I jump to school choice? Because in school choice, the government is providing for education—that is, the money—but not providing the education. It is giving people the money to make wise economic decisions how best to spend the money for the education, and then the decision is made free of politics. The politics is only how much to give, not how to spend it. So I can jump from the Senate cafeteria to charter schools effortlessly. But thank you for that wonderful story with lessons that are far deeper than just no wonder the members of the House look so well-fed. You now have explained that to me, for which I thank you. An unadvertised special of my interview.
Steven E. Rhoads: All right, thank you, Bob.
Bob Zadek: Since a market requires information to function efficiently, in socialist, you assign or you decide all the knowledge rests in a few people at the top, rather than in tens of millions of people making independent decisions, and collectively they demonstrate the value of a good or a service. That it’s the information that cannot be acquired by the people at the top that is just produced automatically by the independent and free actions of all the people at the bottom. In effect, it’s democracy written as big as it can be written, when people are voting thousands of times a day on the value of a good or a service. And that’s how we learn which way money should flow. Is that a fair way to close the show, Steve?
Steven E. Rhoads: That’s an excellent way to close, Bob. I’m absolutely with you. Yep. Enjoyed our conversation very much.
Bob Zadek: Thank you. This is Bob Zadek saying thank you so much to Steve Rhoads, who has taught public policy at the University of Virginia and has just published an updated edition of his best-selling book of about 25 years ago, but now it is current through yesterday: The Economist’s View of the World. Thank you so much, Steve, for spending time with us, and thank you to all of my friends out there for sparing an hour of your valuable time to learn what Steve and I have to offer for you.