Gary Becker -- The Economist's Economist

welcome to uncommon knowledge I'm Peter Robinson be sure to follow us by the way on twitter at twitter.com/usembassymanila Prize for economics which places him in an unusual position in the field of economics he has nothing left to prove to anyone dr. Becker publishes regularly maintains a full-time teaching load and blogs on the Becker Posner blog one of the best read blogs on Law & Economics several times a year he visits us here at Stanford where he is a fellow at the Hoover Institution Gary Becker welcome thank you yeah segment one what happened 1983 to 2008 the American economy grows a quarter of a century of growth marred only by two brief shallow recessions and then in the beginning of the autumn beginning in the autumn of 2008 a credit crisis and in the month that followed perhaps the worst economic turmoil since the Great Depression what hit us financial crisis is what hit us we had over particularly the period in the 2000s great expansion of credit banks were very exposed in the housing market elsewhere an expansion I was partly the fall of the banks or expanded partly the fall of the government and the Fed kept interest rates low during particularly 2004 2006 and Congress and who urged the banks to be lending to low income groups with low credit so we had the Community Reinvestment Act that began acts in the 1970s but then the great push began in 1990s and then in the 2000s to lend more and more to these groups who really didn't have the credit rating or the income that they could in any realistic scenario about long term prices housing prices pay back so you put all these thing together we did have an enormous financial crisis then spilled over and affected the economy as a whole and so while the financial crisis the worst we had since the Great Depression there's no doubt about that the real economy affects or among the worse I mean but warden so far worse than in the 70s and even the early 80s and so on so you know there are others that were close to it and comfortability Gary here the conservative that I am I'm perfectly it makes all the sense in the world to me that the government was involved in this in one way or another the Fed is too loose with money Barney Frank and the in Congress is pushing credit to people who can't afford it but that the bank's got it wrong that they didn't understand their own exposure that people who are extremely well paid and in a highly competitive environment so I feel let's put it this way when Alan Greenspan testified before Congress in 2008 I felt for him let me just read this to you this is greenspan testifying i Alan Greenspan I made a mistake in presuming that the self-interest of banks and others was such that they were they were best capable of protecting their own shareholders the loan officers of those institutions knew far more about the risks I assumed involved in the people to whom they lent money than even our best regulators a critical pillar to free markets did break down that shocked me I still do not fully understand why it happened close quote did you feel his shock to you what well I was I don't know if I shocked but I was disappointed and and it's it's a you know a challenge to understand what went wrong but I think went wrong and leave out the government the Fed as you said that that was a contributor clearly in a significant concern the only ones I think Greenspan is actually right what I think happened was that banks and including very able people like I once asked a very eminent bank who survived pretty well the crisis what about the head of layman what was he said no as far as you know there's a very evil person fall I think English I think the banks didn't understand the risk that they were dealing with they thought they were diversified they had a credit protection they had you know the modern securities with derivatives and alike which enables one to take on more risk but to diversify it to a large extent not that you were bearing no risk but you thought you were heads pretty well against risk now it turned out I think that neither the financial theorists who created a lot of these new instruments the derivatives are like no other bankers understood fully the risk properties of these assets that they were holding that they weren't capable when everybody was in somewhat trouble I got to run on a bank right a bank can handle 2% of the people running on it maybe three but it can handle a run on the bank and went but one bank is run on other banks yes run well something in that ballpark happened during this crisis the banks were investment banks while holding assets that had greater risk if a if a general difficulty occur than they appreciated that they will hold it and greater than regulators appreciated right what do you were this nobody expected the regulator's for sure they had the power to stop a lot of this so people say we need more regulation I always answer them but the regulator's had the power in the past they didn't use it what makes you think they'll use it in the next Christ hope it's not so severe but there will be further crisis in the future matter what we do hopefully of a less severe magnitude all right segment two trying to fix it February 2008 President George W Bush signs into law 168 billion dollar stimulus package this is almost entirely tax rebates October 2008 Bush signs into law the emergency economic stabilization Act a major component of which is the 700 billion Troubled Asset Relief Program or tarp grade the Bush administration's response to the crisis well nixed I would say I mean Sophia I'm a teacher I usually give a B C and D wouldn't get an A but I wouldn't give them a C either I would give them somewhere in the BB - beat and partly I'm because it caught everybody unaware and so you know how to react to it we weren't prepared in reaction to whether it would been bush or anybody else in power I think we weren't prepared so if the president had called the University of Chicago Department of Economics and said dr. Becker convene your colleagues let me know in 24 hours what I should do I'll do it you wouldn't have been able to tell him we might have told him something but I don't think we would had it perfect let me put it that way right I don't think we would had a perfect first of all it wasn't clear and I'll say for myself wasn't clear to me initially how much the financial difficulties which eventually became a crisis which spill over into the real economy I mean sometimes there are financial problems in real economy doesn't suffer so much and for a while look like that was going to be the situation in the United States that was that was uncertain in terms of the overall things that the Bush administration did I think I generally believe tax cuts are good I think they're better than governments increased spending so if I had to say which stimulus do I prefer I'd certainly prefer the tax cuts that the Bush administration did then the stimulus package that the Obama administration eventually did let me just get that out February 2009 President Obama signs into law 787 dollar 787 billion dollar American Recovery and Reinvestment Act which we all refer to casually as the stimulus bill that's now up to something like eight hundred billion dollars two intriguing facts about that to me by August 2009 only about a fifth of that had been spent as we tape this only two-thirds has been spent okay well first of all it's long been known in the business cycle literature that fiscal stimulus in terms of government spending a bad counter cyclical policies because they take very long to get in you have to first now I decide on the amount how they're going to be spend and so on and no government has a whole backlog a part of projects that they can immediately implement so even if you think fiscal stimulus in principle are a good idea we know they don't work out very well because the long legs and getting them spent and we saw that in this episode secondly the problem with the stimulus package that was passed was that it was directed it was mainly not so much a stimulus package oh that's what it was called but it was a attempt to reorganize parts of the American economy in terms of the sectors that Congress and the president believed were underfunded not over on them a few too little employment or too much unemployment but underfunded they really wanted to see expanded that's true why they supported you know the energy programs within that alternative energy sources they supported higher education support and educational programs they supported our Rd some of those may have been worthwhile that very little to do with stimulating the economy because these weren't sectors that much unemployment so if let's say you you increase research on wind power well you're going to draw a people who were doing research or engineering for other activities these weren't unemployed people unemployment is still as in all recessions heavily concentrated among the low skilled the low educated people the educated people are college graduates have really quite low unemployment too right others the long-term unemployment which is a serious problem when you deal with unemployment is concentrated among the less educating the low skill the stimulus package wasn't addressing their needs so I thought at the time that it would be a failure I still think it's a failure it's not easy to get hard evidence to evaluate what the effect of the stimulus was unemployment's on a lot of the claims that had created X many jobs as complete nonsense they're counting anybody anybody was employed by the stimulus without saying well what would they have been doing otherwise right and that's the real test so I think most of that stuff is worth and it'll take a while before we really be able to evaluate but my own belief has been that it was a failure it didn't spend a lot of money and didn't do much in terms of creating jobs Kari you mentioned that you prefer tax cuts I do believe that tax cuts are the right way to attack not only a recession that we a serious recession that we had but also in and what I consider the really the primary problem for the US economy how can we speed up the long term rate of growth so that given that we have this debt given that we have the entitlements coming up that the economy will grow enough and we can keep spending from growing quite as rapidly that if we can increase the rate of growth of the long term rate of growth the economy won't buy one half percent per year I think we can handle most of our debt problems pretty well and yet have a much better economy segment 3 the Fed feds response to the crisis Ben Bernanke helps engineer the takeover Bear Stearns by JP Morgan supports the seizure of Fannie Mae and Freddie Mac agrees to the 85 billion dollar rescue of AIG helps Treasury secretary Hank Paulson convince Congress to approve the tarp and since then the Fed has kept interest rates close to zero and engaged in the purchase of mortgage bonds driving down the long-term rates and swelling the Fed's balance sheet of some two trillion you grade that well some of those things I think were desirable and some not so that if you asked Milton Friedman was my teacher one of the great economist of it ever but certainly the 20th century he always said that if we have a financial crisis he thought of money you need a very proactive fed they should be you know buying assets creating money I mean that's what they're doing creating money creating bank reserves we hopefully will both great money and putting pressure on interest rates so so some of that I think was desirable important to do now was it all desire you mentioned like six or seven different things that they did probably went too far in the top program they shouldn't have done done as much on low interest rates probably desirable to push interest rates down to some extent although an to buy bonds unfortunately they create a lot of excess reserves of banks and now over well over a trillion dollars worth and they may go higher if they get qe2 and that didn't stimulate much bank lending so the question I would ask is with all these reserves that banks have now why aren't they lending more that's to me is a really important question so there's no thing the banks have more than a trillion dollars on their books in excess of their legal requirement that's what and yet they're not lending so we know the problem is not a lack of liquidity absolutely know that yeah and is Bernanke now he's signaled that he intends to keep interest rates low he gave a speech earlier in October suggesting that he's willing to go on buying mortgage bonds to keep long term rates down is that foolishness misdirected effort yeah I wouldn't support the qe2 the key to is the second quantitative easing that's right so I take called qe2 I wouldn't support that now I think the banks Heather I don't think creating more bank reserves is going to increase lending I think I think you have to think of the lending problem from a different direction and maybe the outcome of the election in the few days will help in that regard I think businessmen in particularly the potential borrowers and investors got frightened by a lot of the legislation that was being passed and being proposed by the new Congress and by the president they got frightened by the health care bill and I think it's a bad bill for a variety of reasons it relays to cost the business particularly small business I got frightened by that I got frightened by the talk of increasing in taxes on higher income what they call hi rich people but higher income people that say they got frightened by the discussions of a tax on carbon they got frightened by a discussion that we're going to tighten up on antitrust policy and investigate business more more closely they got frightened by the attempt discussions of consumer protection which was embodied in the financial reform Act they got frightened by Obama's continual discussion of those billionaires and how we're going to you know we're going to be against a billion I've met with some businessmen recently some dinah bull Democrats very well wealthy people who said this time they're voting for the Republicans I mean the attacks on business and well you given all given all that I think business has been hesitant about hiring more and expanding in that kind of environment and I think if I had to put a single my finger on a single factor then my judgment was most responsible for the fact that we didn't get more lending I think you didn't get a big demand from small and medium-sized business that they wanted to expand in this environment I think that's been a really major problem for the United States and until we correct that problem I think we're going to have a slow recovery Kerry your friend economist Alan Meltzer wrote in The Wall Street Journal recently President Obama could do more for the economy than Fed Chairman Ben Bernanke by declaring a three-year moratorium on new taxes and new regulation well certainly a new taxes I agree the only regulation I would like to see that imposed that we raise the capital requirements on banks particularly on the too-big-to-fail banks I see we have higher capital requirements so they can expand as much as they did during this situation now we've always had capital requirement saying well let's start regulating something we didn't regulate I think they were insufficient so that would be the one regulation I would like on the other hand I would like to take away some of the additional regulations that's embodied in the financial reform Act the Gabel gives a lot of discretion two regulators two regulators were bad during this crisis what makes one think they can be any better so you want rules right not discretion so I would have a simple rule about capital requirements that I would have but I would at the same time not not simply add any other regulations I mean I don't know of any others I want but I would reduce some of the regulation that we have I would take away some of the power from the regulator's I can recall having dinner with Milton sometime in the 90s when the economy was doing very well and Milton was particularly cheerful because of the gridlock in Washington we have a Democratic president who wants to give money to his people and Republicans in Congress who want to give money to their people and they won't let each other do that if Republicans win in a major fashion we're recording this a week before the election do you expect the economy to improve yeah I agree with Milton I mean I I don't good luck will will come back and help us it's gridlock will save us yeah generally neither party has done too well when they had I mean they're exceptions to this rule but certainly for those of us who believe in small government lower taxes less regulation like myself gridlock can often be useful in a sense that you make it more difficult you'll make it impossible but you make it more difficult to greatly expand the role of the government and I think that's good for the United States it's good for most economy but given this situation the United States now it's certainly good for the United States segment for health care this past spring just after the passage of the new health care legislation let's call it Obamacare I interviewed you for The Wall Street Journal you said quote it's a bad bill health care in the United States does have a number of weaknesses this bill doesn't address them it's going to increase health costs not contain them increase costs why well there are a number of things in the bill that are cost increasing on I'll start with one major one we had 45 million people who didn't have health insurance mainly these were young people these were and sick people couldn't get although a few of those but they're mainly young people made a calculation they're pretty wealthy and they didn't have it okay we brought them in know there are ways to bring them in that I might have supported but we brought them in in a very bad way instead of giving them a minimal catastrophic health care plan which is one that could make some sense we gave them a pretty require them not just gave them require them to have a pretty generous plan and we raised the poverty level for which they would get subsidized by the government from simply the ordinary poverty levels like three times the poverty level I don't mind the statistics now in my mind but it was something like that that's going to be a big force expanding overall medical spending secondly one of the weaknesses in American health care system it's to employer base employers get subsidies for providing insurance we're one of the few countries in the world that have mainly an employee based insurance system instead of sort of taking that away which would have been the right approach to do it we expanded it in fact we've we now institute a system where we're taxing small businesses if they don't institute of health care bill now I hear from some small businesses they'll prefer to pay the tax right then do it because they're obligate to have an expensive plan that they'll be liable for but that's another cost increasing one we did very little if anything to reform Medicare other than maybe having a lot of rationing and so on in medet Medicare what we should have done is made individuals responsible for a larger out-of-pocket share of their total expenses at all levels including Medicare levels Switzerland my favorite example Switzerland has on average 30% of total medical expenses are out of pocket that is to pay for by the individual either in terms that they take a big deductible or they have a big co-payment the u.s. average at the before the passage of the bill is around 12% the bill doesn't change it in any significant way carry whether Republicans win or not in the election this fact that we heard over and over and over again during the health care debate will remain effect we spend about 17 percent of our GDP on health care the next most costly health care system that of France and then Switzerland comes third are both about 11% dramatically lower what's going on well a couple of things that are going on one we're giving people access to treatments that they don't act get access to in France and Switzerland so if you hold a person now you can we say well they're putting a big value on the line no the French and and the Swiss and number of other kind of pretty callous when they're dealing with all appeals there well you don't have that long to live and you know he went out there let me actually get something for the extra amount that I think we do I think we do I mean I think there are a lot of strengths in the American system we've been the major innovator they ride off of particularly countries like France right off innovations produced in the United States and whip we're paying for that so you look at most of the R&D in the medical area from anything after the war right through to the present time it's happening here what's happening here so we've been the major in event fact because of the restrictions in Europe a lot of the research of drug companies that are based in Europe but they sent their research into the United States for a variety of reason so you know we producing a lot of the innovations and we're giving greater access to the new drugs and so on well that's expensive to do it is it worth doing it a lot of it is worth doing in my judgment I think people are willing to spend a lot for even small improvements in their life expectancy no small reductions in a probability going to die in the next year or so that's expensive but we're doing that I system as I said is not perfect I mentioned we'd like I should we should get rid of the employer based healthcare we should have people paying a bigger out-of-pocket share but it would be a mistake to say everything about the American system is bad and that's why we're spending so much we're allowing people with giving people access to a variety of treatments they cannot get access as readily in other countries and I think a lot of that's good when I interviewed you in the spring you said repealing this bill will be very very difficult now even if Republicans win at the upper end of what some predictions now suggest they might win they won't have the two-thirds votes in either house that they'll need to override presidential veto as a practical matter they won't be able to repeal Obamacare so what what what should they do I think you can make changes you're not going to repeal Obamacare I think that's a thing you have to accept and when crunch time came probably a lot of Republicans wouldn't vote to completely repeal Obamacare but you can push it back in various areas for example you can try I mentioned one of the I think mistakes of the bill weaknesses are the bill cost raising aspects of the bill is that for these forty five million people or so will being brought under and provided with health care you can scale back the fraction of those people who have their care subsidized you can scale back the magnitude of the care that you are providing make it covering catastrophes what a lot of people would like to be protected against so if I'm have no health insurance and I have I get cancer and I go to the emergency room and I get treatment I have to stay in a hospital the taxpayers paying for all that right so you want people have some catastrophic care so you try to push in that direction and then you say only the you know people who have really low incomes will be the ones who are subsidizing other people have to pay for it themselves that would have a I think a beneficial effect in reducing the amount spent I'll give you a more efficient system another thing you can do in which I didn't mention before you can allow people in one state to buy insurance from companies in other states nothing in the bill speaks to that issue that's something I think maybe you could get the Democrat the president to go a long time yeah I think he would sign that and so there are a few other things that I think you could do so I would say let's not think of it I was running the Republican Party which thankfully I'm not what I would say is let's not think of it you know throwing the Obamacare out let's see if we make it work significantly better so maybe by keep doing this maybe we end up with something that is better than what we had before that's the way Iowa's poetry segment 5 our final segment Kerry what is to be done growth still sluggish housing prices in many markets still sinking here in California as many as 1/5 of homeowners are underwater on their mortgages unemployment still at more than 9% and a similar situation obtains in much of Europe let me give you two policy prescriptions and you you choose how's that okay the British government the new British government intends to eliminate its structural deficit of more than 11 percent of GDP in just five years government departments will see their budgets cut by an average of almost 20 percent half a million government workers will lose their jobs that's one here's two let me just quote him to you economist Paul Krugman writing in the New York Times just a couple of days ago quote economies that have experienced a severe financial crisis generally do not heal quickly America needed a much stronger stimulus program than it got maybe voters will have a second thoughts about handing power back to the Republicans who got us into this mess and give mr. Obama a second chance to turn the economy around so on the one hand a model of austerity cut on the other hand Paul Krugman saying we didn't spend enough we need more stimulus and we need it fast what does Gary Becker saying well I already said I didn't think the stimulus package work so I don't see the that the second stimulus is going to work anymore so no I don't support a second stimulus package I didn't support the first one in terms of the British approach the cut back I would try to if I was in Great Britain I think a case strong case can be made for trying to cut back government spending but not do it at the same time that you're raising taxes very heavily so you try to get the economy growing a lot I wouldn't directly worry so much about the fiscal situation but I worry about what policies would increase the rate of growth of the economy I think cutting back a lot of the government sectors would increase the rate of growth of the economy I think cutting back some of the taxes and I'm not an expert on British tax structure but cutting back some taxes would increase the rate of growth of the economy I think if you can grow the economy faster which will include some cutbacks in government spending uh certainly slowing down the rate of growth of government spending you can grow the economy faster that's the way you're going to get out of this financial and fiscal crisis and the British are more along the right direction than people speak about a second stimulus and that's actually a very important point for Republic for the people who are going to be in charge soon cutting spending is not the end it's a means and you may want to proceed at a different pace from what you have in mind because the end is growth absolutely that's correct now the Paul Krugman here's here's why I one reason I tossed him at you is because he holds a Nobel Prize they're laymen I'm a layman here and I say to myself now wait a moment we had reagan enact what let's call it brief broadly speaking the friedman program or the chicago school program of of limited government and tax cuts we have 25 years of growth and now Paul Krugman Robert Bryce Larry Summers it's as if Milton Friedman had never been born and John Maynard Keynes had never died and how so how is the layman to understand what is taking place in your profession not easy not easy because Paul Krugman did some important work in economics oh he's Nobel Prize certainly a merit he did important work in international trade not on stimulus packages and why economists serious data he was serious what she was I he's not doing serious work anymore but he was a very serious and good economy Larry Summers is excellent he to say no very well Robert rice you know he wasn't really an economist I don't strain like I do an outreach I don't think it's training is economic I think it's hard for him/her for any you know any population when economists don't agree on issues I think it's very difficult to hear it's not a disagreement of emphasis it's a disagreement about fund about fundamentals I don't know what Larry Summers would say if he was not in the government and so on Krugman is not in the government so he's saying what he believes I think he can't you know what I trust with the American people is they've always had a lot of common sense and yes they can follow all the technical arguments from economists they can give it a common sense touch this is you know just consistent with my experience what have I gotten out of the stimulus package they said they're going to reduce unemployment by almost two percentage points which we were only down by like a half of a sentence point from the peak unemployment which is really very disappointing so I think if you trust your common sense you can't fully understand the arguments and the difference in you know these arguments aren't 100% settled but you can say what looks like a more sensible policy that we we trust a private private sector to get us out you know of this and to grow us faster or we trust government to grow us faster and I think most Americans believe and I think they're correct and I believe that the private sector has shown that it performs better overall not a hundred percent better overall despite the mistakes of Investment Banking per Falls a lot better overall than the public sector doesn't that's why country after country in the world as China and Brazil and even Russia and India for sure have been pushing their economies more toward the private sector not against the private sector because they know they've learned that experience carry let me close with a story you knew Milton Friedman very well I was privileged to be an acquaintance let me tell you about a dinner I had with Milton just 18 months or so before he died I had I had read bill Buckley's book God and man at Yale which been published fifty years earlier and a Buckley placed the locus of the statist impulse at Yale half a century ago in the Department of Economics and what I had discovered at Dartmouth my alma mater here at Stanford that first rate economics departments cannot be first rate economics departments without a heavy emphasis on free-market economics so I congratulated Milton Friedman far be it from me but I congratulated him on having lived to see a major victory and Milton would not have any of it he said we may have won an intellectual victory but there's no evidence that that there's been a victory in practical politics at all the government continues to grow and grow and grow now he was speaking at a time when Republicans controlled both Congress and the presidency do you see how are you as grima's in your view as that no there's such a disjunction between your not all right because I hear me up I mean I think if you look at a global perspective let's start out looking at a global perspective there's no question the world if you look at the last 30 years or so has moved strongly in the free-market direction I think China started to reform in 1978 there were no private sector now private sectors is more than half of the employment in the Chinese economy state sector is still important and a lots of problems more than half zero out of near 50% ear started reforms in 1991 when the private sector was throated at every point by restriction what they could do now the most robust part of the indian economy is the private sector yet investments and so on going on brazil even under lula who was a comes out of a trade union kind of socialist background i continued to promote more or less the private sector even russia certainly went away from communism and so on so you look at the world as a whole I would say Milton Friedman should should have been felt I doubt you know my his ideas or the free market ideas and more generally I've been extremely successful now you have grandchildren 50 years from now will they live in what you would still you and Milton with would still have recognized as a fundamentally free country well economists and notoriously poor at predicting fifty years from now I believe they will I believe they will you know barring nuclear and all that all these problems I believe they will I have a lot of confidence in the American people I think that basic common sense I think common sense I used to say economics is common sense sort of made more systematic and more more formal I have a confidence in their common sense I don't think they're going to deviate into any significant degree or consistently against a economy it's basically organized by private sector and if we continue to do that our grandchildren will be a lot well better off than we are economically and health-wise and alike and it will be basically a free economy dr. Carrie Becker thank you I'm Peter Robinson for uncommon knowledge and the Hoover Institution thanks for joining us

Channel: Hoover Institution

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Keywords: HooverInstitutionUK, Economy, United States, recession, Alan Greenspan, government, housing, banks, Bush, financial crisis, Federal Reserve, private sector, health care, Obamacare

Id: QT6TnY6sHcU

Length: 36min 37sec (2197 seconds)

Published: Thu Nov 11 2010