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121: Are We Really a Capitalist Society? A Harvard Professor Explains.

Buck: Welcome back to the show everyone my guest today on Wealth Formula podcast is Dr. Jeffrey Myron. Professor Myron is a senior lecturer, director of Undergraduate Studies and director of Graduate Studies at the Department of Economics at Harvard. He’s also director of Economic Studies of Cato Institute, which if you don’t know you should, it’s the Libertarian think-tank. Dr. Miron’s commentary on economic policies appeared on CNN, CNBC, MSNBC, NPR, Bloomberg, Fox, BBC and dozens of other television radio and print media around the world and now including Wealth Formula podcast. His area of expertise is the Economics of Libertarianism which is certainly my favorite kind of economics. Professor Miron, I’m going back between professor and doctor, I don’t know what you prefer, but welcome?

Jeffrey: Jeff. Jeff is good.

Buck: Welcome to the podcast!

Jeffrey: Nice to be here thank you.

Buck: So I wanted to start out with what may sound like a sort of a simple question but one I think is worth asking because a lot of people including myself identify themselves as Libertarian. And you offer a course I know I read as a popular course at Harvard called the Libertarian Perspective on Economic and Social Policy. So I want to ask you because everybody runs around calling themselves Libertarian especially in

Silicon Valley these days or San

Francisco. What is a Libertarian?

Jeffrey: So I think in the simplest terms Libertarians want smaller government they want the government to focus on respect for individual liberties and rights. And when they say smaller government many of them mean substantially smaller governments. It doesn’t come from a view that government is evil, it doesn’t come from a view that markets and other private arrangements are perfect, it comes mainly from the view that governments, even when well-intentioned tend to make things worse. The treatment is often worse than the disease. So even though private arrangements are not perfect, they’re typically better than when governments try to fix those private arrangements that cause unintended consequences.

Buck: Got it. So in terms of, so let’s talk about it in terms specifically about the what that looks like in the economy. Let’s drive that way first.

Jeffrey: So it would mean that we would have vastly reduced expenditure at the Federal level in particular. Also at the state level, means little or no spending on entitlement programs, it means far less regulation to a much greater degree in some areas than other but overall far less regulation. Of course if you have a much smaller government measured by expenditure then you’re going to have much lower taxes because you don’t need to raise nearly as much revenue so it would look more like say the first fifty or a hundred years of the US rather than the next 125 years.

Buck: Right. So how about, okay so then so then that’s sort of the fiscal side of it. Now there’s a, you know, there’s the social aspect. The emphasis on this, you know, of more freedom. Individual freedoms. Can you talk a little bit about some of some of those things, some of the positions the Libertarians might have?

Jeffrey: Sure. So Libertarians would be strong advocates of legalizing most or all drugs. They would be strong advocates of legalizing gay marriage. They’re strong advocates have expanded legal immigration, indeed some advocate for literally open borders. Many Libertarians not exclusively, are advocates of choice as opposed to being a pro choice rather than pro-life. In the criminal justice arena they have strong concerns that existing policies are enforced in very racially biased ways and so they again are for much less government intervention with respect to people’s individual decisions or interactions outside of strictly economic ones. Libertarians try to apply that respect for the individual and advocacy for small government consistently across all areas of government.

Buck: So and this is what’s interesting to me because you’re just, you know, at this point you’re you’re pretty much confirming why I identify myself as a Libertarian and what strikes me as very interesting, is that many people listening to this show out there are probably thinking, hey I’m kind of a Libertarian, you know? I like Small government. I don’t care what you do or who you marry. But the funny thing is in our two-party system neither side seems to reflect these particular principles even though they seem like a natural marriage. Freedom to do whatever you want as long as you’re not hurting somebody else and at the same time having small government. The Republican Party certainly moving farther and farther away from those Libertarian elements. Why do you think this is?

Jeffrey:  That’s a puzzle, for which I don’t think I have a great answer. I guess what I would say though is, we sort of do have Libertarian government. Of course, not what Libertarians would ideally like. We have a lot more government than we had 200 years ago. But to a first approximation people can start businesses as they wish they can work in whatever occupation they want, subject to some silly occupational licensing regulations, but overall they still have a lot of choice. Marry whom they want, practice religion that they want, taxes while higher than Libertarians want are not so oppressive as to destroy the economy or anything like that. So compared to the long human history people living in the United States, other rich democracies these days, indeed even many other countries around the world, do have lots and lots of freedom. So yes it’s too bad that we can’t get the major parties to think more like Libertarians, and yet the fact that the public goes back and forth between the two parties and doesn’t ever seem to settle predominantly on one or predominately on the other, that often you see one House be Republican and the other house of Congress be Democratic, maybe that is reflecting the generally Libertarian sort of sympathy that’s that’s fairly broad in the US population.

Buck: Yeah but it seems odd to me in in some ways that the increase in polarization of the parties seems to be pulling away from that sentiment in the middle and given that and given the fact that it seems to me, I mean if you took a poll, I don’t know you maybe you maybe you have some kind of an idea of this, that probably majority of the country probably would feel fiscal conservatism, probably feel fairly progressive on the the social side. And then you’ve got a ton of money involved with this, right? Everybody in Silicon Valley says there everybody there is a Libertarian right? So why can’t a Libertarian candidate, why has a Libertarian candidate been unable to get some kind of traction or make some kind of legitimate run towards the presidency? Jeffrey: So I think they could try to blame that fact that you just described well on a lot of things on the impediments to becoming a third, a viable third party etc etc. But I think the real reason is that Libertarians are kind of their own worst enemies. We like to argue, we like to consider the extreme. So if we meet someone and we talk about drug policy and we manage to convince that person that maybe marijuana should be legal we don’t ever just kind of count that as a victory and shut up, we’d say, okay now that I’ve convinced you that marijuana should be illegal let me convince you the heroin should be legal. And of course you know you lose a lot of support. It’s one thing to say that the Medicare program day is well intentioned but it’s so expensive it’s going to bankrupt the economy, so we need to cut it back a little bit, you could get a lot of people to accept that that’s a rational position. But as soon as we convince people that then we turn around say, but of course we should actually just get rid of the entire Medicare program. And that of course scares people and upsets people. So the Libertarians have not found the right spokesperson yet. Someone who can be sort of faithful to the purity of Libertarianism and the consistency, and yet present a message that’s moderate enough that you could get a broad set of support.

Buck: Yeah and it’s unfortunate because I think in some respects again the polarization of the party seems to be the perfect set up for something like that to happen. So let’s shift gears again a little bit here and and talk a little bit about your, put on your economics hat. Free markets. So obviously free markets are a big part of Libertarian ethos and, you know, the belief that capitalism is a virtue, and and you know the ability to let ultimately anybody succeed. And as a child of immigrants who lived you know the quintessential American dream because my parents had the opportunity I am, you know, very much a Capitalist with a capital C. But but a lot of people on the other side, you know, maybe a lot of the Bernie Sanders supporters etc. They’re looking at the the mess that is, you know, 2008 and the fallout behind that the massive debt that we’ve got these days and they say hey capitalism looks like it failed. It didn’t seem to do so good. What do you say to those people?

Jeffrey: So I’d say a couple things. First, we had a bad situation in 2008-2009 but it’s completely, it’s at a minimum, highly incomplete to blame that on capitalism. Capitalism has made some mistakes but they were aided and abetted enormously by the government that was trying to promote private home ownership, by the government that was guaranteeing implicitly and explicitly the liabilities of major financial intermediaries and the banks. There was a huge amount of government intervention that at a minimum contributed heavily to the fact that we had an excessive boom and then we had a significant bust. The second thing I’d say is that, if you set aside a few people who are really at the extremes even the Bernie Sanders and the Elizabeth Warren’s I think recognize that capitalism is good at producing the most stuff. If your only goal were to maximize the value of GDP per capita how much we can produce, they would accept that, with a little bit or modest amount of regulation, capitalism is quite good. But they don’t like the way that the fruits of those labors, the way that that GDP gets divided up in a market economy. They want way more redistribution. So they’re actually not socialists in the 1950s version of socialism, where government was owning in the means of production. They are just massive redistributionists. Now, I understand their concern for the people who are unfortunate, but I think they’re missing the fact that most of the inequitable differences in income come from government interfering and creating arbitrary winners and losers, government helping people with lots of excessive rules who are willing to be dishonest to get ahead relative to people who are more honest, government bailing out auto companies who made bad decisions, or big banks who made bad decisions. So I think there is some common ground, for the Bernie Sanders Elizabeth Warren wing and Libertarians, it’s just we agree there’s some bad things, they want to fix it with more government, we think we can fix it better with less government.

Buck: Nomi Prins was on the show a couple weeks ago and she’s, don’t know she’s a New York Times bestselling author, but she said, she was talking about, you know, she was a Wall Street insider and talked a lot about the banks, and sort of how that cartel works. And you know the the point that she ultimately brought out was you know there was this repeal of Glass-Steagall in the 90s that ultimately led to these banks, you know, taking really big risks, right? But presumably what you could say is, hey if you were actually running like a true capitalist society, like a true capitalist economy, you would never have that situation set up because there would be no opportunity for a bailout. So presumably if you didn’t have the safety net of a bailout that you wouldn’t in pure capitalism you wouldn’t have had that problem.

Jeffrey:  Exactly it’s the implicit guarantee of the banks that in my view and Libertarian view is the single biggest cause of the problems. Sure capitalism there’s a famous line, capitalism without bankruptcy is like religion without hell. You have to have the risk that people are going to fail and fail significantly to discipline people to behave, to not take excessive risk, to not think that they’re playing with someone else’s money. But the US government major governments around the world have been bailing out the financial sector for centuries and so of course the financial sector expects to be bailed out and they act accordingly. I heard this great conversation on NPR in the midst of the 2008 crisis. Some woman calls in and says, you know I’ve been yelling at my husband for years that you guys are taking crazy rich, it’s all gonna come crashing down are we gonna lose all our retirements and you’re gonna get fired, and he said nah don’t worry about it. If the crash happens then you’re right, it probably will, the feds will come in and bail us out. And this was just sort of a random person who it was relating exactly what Libertarians are arguing. So I agree with it.

Buck: So tell me what’s going on in your view in the economy right now. There is this idea that, you know, at least in the mainstream, that the economy’s doing really well. And it seems to ignore some of the you know  some of the infrastructural problems going on but what what worries you if anything about what’s going on with the economy right now?

Jeffrey:  The single thing that worries me the most is the build-up of debt for entitlements. The unfunded liabilities for Medicare, Social Security, Medicaid and so on. Those are large and they’re growing, and they’re growing at a rate significantly faster than we could plausibly expect the economy to grow so they’re getting big relative to the size of the economy and if that keeps going then of course they become the whole economy and that can’t possibly happen so that’s a huge concern. There of course are other significant concerns, if the current administration substantially restricts trade and other countries retaliate that could indeed be seriously costly and I think that the restrictions on immigration, they are also extremely bad for the economy. I think immigration does a lot of good things. First of all for the immigrants, but also for the native population. Not just by bringing lower wages for certain types of workers, but by making the economy vital by introducing lots of competition, by generating new ideas sources of innovation and things like that and so cutting off immigration I think is potentially a really bad thing for the economy as well.

Buck: Let’s talk a little bit about debt, because that’s the, you know, that’s something that a lot of people talk about now or we’re what 21, 22 trillion dollars in debt. Let’s let me ask you a very simple question which is why does debt matter anyway? Can’t we just deflate ourselves out of it? I mean…

Jeffrey: We  can either deflate ourselves out of it at one level or tax ourselves out of it, at one level, except if you do that, we’re going to have other effects which are probably going to crush the economy. So in order to inflate ourselves out of it we would have to create a very high inflation rate and that’s probably going to have negative effects on the economy. That means we won’t, while we’re getting more revenue by the inflation tax, which is what the no inflating in the way does we’re getting reduced tax revenue from other sources, so the problem is actually getting worse in terms of the expenditure growing relative besides the economy. We tried to fix it with standard tax with income taxes corporate taxes whatever, maybe we could raise those to a moderate amount without having a major negative effect on the growth of the economy, but to raise taxes enough to pay for the debts that we’ve taken on will slow the economy and that just makes the problem even worse, so it’s a serious problem.

Buck: Oh no and I’m sorry if I seem a little bit tongue-in-cheek about this, but it’s I’ve heard people say well so what if we’ve got debt? We’ll just have more debt.

Jeffrey: Well I would ask such people how they would behave if that were going on in their own personal lives. Of course some debt is totally sensible taking out a mortgage in order to afford a house makes sense. A company that borrows in order to buy plant and equipment and make a productive useful product of course that makes sense. But there are obviously limits you can borrow more than you could ever possibly repay. And what I’m saying the arithmetic shows is we’re borrowing way more than we can possibly repay.

Buck: And really a lot of the other part of this that I was trying to get a little bit is the payments for debt too, right, as they rise then that becomes a significant portion of the actual budget. Jeffrey: Exactly and it’s a vicious circle as the debt gets higher people who are lending to us run the rest of the world demand higher interest rates. That means the interest payments are higher as you just pointed out so that makes the debt worse and then the whole thing keeps going and so you end up in a situation like Greece or other countries that have had debt defaults. So how far away are we from that kind of Grecian moment?

Jeffrey: So now you’re trying to get me to make a prediction. A famous economist said, predictions are hard especially those about the future. But, you know, I suspect where it’s not going to happen in ten years and probably not in 20, but I don’t think it’s much longer than that, unless we change something. Unless we introduce modifications to entitlements that slow their growth meaningfully relative to the current path.

Buck: yeah. I mean I in part, you know there’s, I keep reading about different economists talking about this sort of demographic cliff around 2027, 2028 a just with, you know, the baby boomers and entitlement and all those things coming together, do you think is is that something you’ve looked at closely and you could comment on that?

Jeffrey: Yes that’s exactly right. I mean we are heading to the point where the major trust funds for the major entitlement are forecast to be you know empty within sort of 5 to 15 years depending on exactly which one we’re looking at, and the baby boom generation is starting towards probably already started to retire and it’s going to be retiring at a much faster rate going forward, includes you and includes me, I think. And that puts more and more pressure and the US birth rate is low and if anything seems to be declining so that means there are fewer and fewer young people who are working paying taxes into these trust funds. So everything seems to be going in the wrong direction.

Buck: So if we take the political issues out here which is a big If because the, you know, political capital is the one thing that any Libertarian solution probably doesn’t have right now in either party for that Matter. Give me some policy changes that you think would actually help grow the United States economy and, you know, potentially kind of overcome the debt with real GDP growth.

Jeffrey: So I’ll sound like a broken record, but I think the single most important thing is to moderate Medicare expenditure with higher ages of eligibility with larger deductibles, with other sorts of cost-sharing, so that it’s not growing nearly so fast. And similar things but with less urgency for Social Security. Second I think that we are spending way too much on foreign entanglements. We don’t need to be stationed in Afghanistan or Iraq or any other places around the world. We could reduce national defense spending non-trivially by paying more attention to what’s actually in our interest to defend the country, as opposed to trying to be the policeman around the world. And then last but not least, my my single favorite is, we should repeal drug prohibition. It does not only terrible things to people who want to use drugs, it creates racial animosity, it generates crime, it distorts all sorts of other sort of decisions about policy and without eliminating drug prohibition, we’re not going to fix the over opioid overdose, we’re not going to change the huge racial animosity that we have, so that would be my third.

Buck: I’m curious, that the third one surprises me a little bit. In terms of the impact that that would have, is part of it the ability to, I mean even, to bring, you know, what we have as legal drugs right now and tax them appropriately or make, you know, create markets that are legitimate, how does that necessarily help the economy grow?

Jeffrey: In terms of, I mean helping the economy grow, I guess I interpret broadly as making the economy better. It means that people’s resources will be devoted to not evading the police, to not, it wouldn’t be devoted to as much to criminal justice, to trying to stop crimes which shouldn’t be crimes, it would mean that the reduced expenditure on prisons and jails and prosecutors. So it’s not going to affect the growth rate of GDP, I agree with that, that’s a fair point. But I think in terms of having a healthy economy where people are devoted to entrepreneurship and not fighting each other, I think drug prohibition is still quite important.

Buck: The irony is that a lot of this is so rational that it’s hard to sell to a country driven by reality soundbites. Anyway, this has been a very useful conversation. And how can we learn, professor more about kind of your philosophy, Libertarian philosophy, and you know just get educated more on some of those issues?

Jeffrey:  So I would first point people to the Cato Institute website which has some of my work but a lot work by lots and lots of Libertarians on the whole range of policy issues.it’s just Cato cato.org. And if someone really wants to see my views in particular, I have a book that’s

available on standard websites like Amazon called Libertarianism from A to Z. And that’s actually kind of a summary of the course that I teach that you mentioned.

Buck: Fantastic! That’s great. Well thank you very much again for being Wealth Formula podcast.

Jeffrey: My pleasure. Thank you very much for having me.

Buck: We’ll be right back